Lifetime Gifting – Annual Exclusion

Gifting assets to someone during your lifetime can be an effective estate planning strategy. Lifetime gifting can provide your beneficiaries with immediate use of the transferred assets—whether cash, stocks, a home, or a car—as well as help you reduce estate taxes. This strategy can also help transfer future appreciation out of your estate.  The use of annual gift tax exclusion is a widely used and highly effective method for transferring wealth and minimizing your taxes due.

Understanding how the gift tax “exclusion” works

Under the current U.S. transfer tax system, at the time of death, all lifetime gifts over certain dollar thresholds are subject to gift and estate tax rates as high as 40%. The “basic exclusion amount” is a combined lifetime gift and estate tax exemption. This is currently set as $12.06 million per donor in 2022. In addition to the lifetime gift and estate tax exemptions, donors are allowed to gift any number of people up to $16,000 per recipient in a single year tax free. Annual exclusion gifts are not included in the calculation of gift tax liability. As a result, annual exclusion gifts will not count against the donor’s lifetime gift and estate tax exemptions.

However, if your gift exceeds $16,000 to any person during the year, you must report it on a gift tax return (IRS Form 709). A married donor can effectively double annual exclusion gifts to each recipient by electing to “gift-split” with a spouse if both spouses consent. Spouses splitting gifts must always file Form 709, even when no taxable gift is incurred. Once you give more than the annual gift tax exclusion, you begin to eat into your lifetime gift and estate tax exemption.

Unqualified Gifts

Not all gifts qualify for the annual tax exclusion. Only gifts of present interest will qualify, meaning the recipient must be granted immediate and unrestricted use, possession or enjoyment of the gift or asset.

­Gifts to irrevocable trusts

There are different types of trusts that may be set up for the benefit of a gift recipient. Irrevocable gift trusts allow the donor to retain control over the trust assets while avoiding additional estate and gift taxes.

Contact Us

Gift giving can be a daunting task but with the right knowledge and approach it can be a highly effective and rewarding strategy for transferring wealth. For guidance through the gift giving process, contact our experienced trust and estate accountants by filling out our contact form.