When you hear about the existence of the federal estate tax, you would logically have a bright idea. If you are exposed to the death tax, you could just give gifts to your loved ones while you are living. You would essentially be giving them their inheritances in advance.
The estate tax was enacted in 1916, and for a while, people could go this route to avoid the estate tax. In 1924, a gift tax was enacted to close this window of opportunity. It was repealed in 1926, but it was reenacted in 1932, and it has been in existence since then.
There is a gift and estate tax marital deduction that allows you to transfer any amount of property to your spouse free of taxation, but transfer taxes are potentially applicable on asset transfers to anyone else.
Gift Tax Exclusions
You do not have to pay the gift tax on every gift that you give, because there are gift tax exclusions. One of them is the annual exclusion. The amount of this exclusion stands at $14,000 at the present time. You can give as much as $14,000 to any number of people within a calendar year without incurring any gift tax exposure.
There is also an educational gift tax exclusion. If you want to pay school tuition for students, you can do so free of taxation. We should emphasize the fact that this is a tuition only exclusion, and it does not extend to fees, books, and living expenses.
Plus, you cannot give the money directly to the student tax-free. You would have to pay the institution directly.
You can also pay medical bills for others free of taxation, because there is a medical gift tax exclusion. This exclusion extends to health insurance. It is possible to buy health insurance for the benefit of others without worrying about the imposition of the gift tax.
Unified Gift and Estate Tax Exclusion
The gift tax and the estate tax are unified under the tax code. There is an additional exclusion that extends to the gift tax in the form of the unified gift and estate tax exclusion. The amount of this exclusion in 2015 is $5.43 million.
If you wanted to give more than $14,000 to someone within a calendar year, you could use a portion of your unified lifetime gift and estate tax exclusion to give the gift in a tax-free manner. However, you would be reducing the amount that you have left to apply to future gifts and the estate that you are passing on to your loved ones.
Wealth Preservation Consultation
We can help if you are concerned about taxation. If you take the right steps, you can position your assets optimally to preserve your wealth.
To set up a free consultation, contact us through this page: Grand Forks ND Estate Planning Attorneys.