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The Annual Gift Exclusion and How it Helps Your Estate Plan

Very few Americans will ever need to worry about paying the federal estate tax. Those for which the tax may apply, however, should know that the current exemption for individual estates is $5.49 million before the 40 percent estate tax gets applied.

Although the proposed tax plan in Congress would lead to significant estate tax changes in the coming years, for now it remains important that wealthy individuals take whatever steps they can to minimize their tax obligations.

One way to reduce your tax liability is to make of the annual gift exclusion. You may make a gift of $14,000 or less to another person, completely free of taxes. You can make as many of these gifts as you wish, so long as they are to different recipients.

The exemption applies even if the gift is worth more than $14,000, although some taxes may be involved. A $20,000 gift, for instance, would have taxes applied to the $6,000 over the exclusion limit. Couples may double their gifts, which means they can give $28,000 to individual recipients without the gift being taxed.

The exemption is based on a calendar year. Thus, if you plan to give a particularly large gift to someone, you might consider splitting it in half and giving part in December and part in January. That way, you could maximize the effect of the exemption.

The gifts you give do not have to be cash. They could be assets, such as stocks or real estate. The $14,000 (or $28,000 for couples) exclusion still applies.

Providing gifts to children

There are some slight differences in the rules when it comes to giving money or valuable property to children before they become adults. If you decide to give a large gift to a minor child, an adult must still be responsible for the money. This is typically done through an irrevocable child’s trust or a state-authorized custodianship.

For a gift to a minor to qualify for the annual gift tax exclusion, it must meet the following conditions:

  • The child must receive the property outright by the time he or she reaches age 21. The property and all income it generates may be spent by or for the benefit of a recipient who is not yet 21. Any trusts created for the benefit of the child must state that the property will be turned to the recipient by his or her 21st birthday.
  • If the child passes away before age 21, the property remaining in the trust must go to the recipient’s estate or a beneficiary the recipient named in the last will.

If you would like to learn more about the annual gift tax exclusion and how you might incorporate it into your estate planning efforts, meet with an experienced attorney.

Schedule Your Consultation with Our Experienced California Estate Planning Attorneys

Bartlett & Herrington, P.C. is a top estate planning law firm in California. Our attorneys help families set up living trusts, wills, power of attorneys, healthcare directives in Santa Barbara, Ventura and Montecito.

We also serve clients in estate planning matters, probate, elder law, retirement planning, asset protection and Veterans Affairs (VA) aid and attendance planning.

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