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WHAT IS THE ANNUAL GIFT TAX EXCLUSION?

Wealth Preservation

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High net worth families must be aware of the existence of the federal gift tax. Actually, everyone is potentially exposed to the gift tax. The reason why most people don’t pay this tax is because there are exclusions. One of these exclusions is the annual gift tax exclusion.

$14,000 Per Person, Per Year

Under currently existing laws, you can give as much as $14,000 per year to any number of gift recipients free of the gift tax. This is not $14,000 total; this is per person, per year. You could give $14,000 to everyone watching a Yankee game with you at Yankee Stadium free of the gift tax.

However, if you gave one person $15,000, the transfer of $1000 would be taxable.

Unified Gift/Estate Tax Exclusion

Though that $1000 would be taxable, you could use a portion of a different exclusion to give the gift entirely tax free. There is another exclusion that you could use that exists in addition to the annual $14,000 per person gift tax exclusion.

The federal gift tax is unified with the estate tax. The gift tax exists to prevent wealthy people from giving gifts tax-free while they are living to avoid the estate tax.

There is a unified lifetime gift and estate tax exclusion. The amount of this exclusion in 2014 is $5.34 million. We must emphasize the fact that this exclusion is something that is completely separate from the annual per person exclusion.

You don’t have to use any of this exclusion until and unless you give a gift to someone in excess of $14,000 during a calendar year.

Marital Deduction

It should be noted that you do not have to use any of your annual exclusion or unified lifetime exclusion to give a tax-free gift to your spouse if you are in fact married. There is an unlimited marital deduction that allows you to transfer any amount of money to your spouse free of taxation. This applies to lifetime gifts, and it also applies to the value of your estate when you leave your spouse an inheritance.

Combining Annual Exclusions

While we are on the topic of spouses, you should understand the fact that your spouse has a $14,000 annual gift tax exclusion. You have your own annual $14,000 gift tax exclusion. If you combine the two, as a couple you could give as much as $28,000 to an unlimited number of gift recipients every year tax-free.

If your assets exceed the amount of the estate tax exclusion, you would naturally be looking for ways to transfer assets in a tax-free manner. The utilization of this annual gift tax exclusion could be part of the plan.

If you make measured divestitures over a significant period of time utilizing this annual gift tax exclusion, you can transfer assets tax-free to people who would otherwise be inheriting them. At the same time, you would be reducing the taxable value of your estate.

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New York residents who are in possession of a significant amount of wealth have some great responsibilities, and some great opportunities. Accumulating wealth is challenging, but it can be just as challenging to keep these assets in the family over a number of generations. This is where legacy wealth planning in New York becomes important.

What is legacy wealth planning? In a general sense it is the process of positioning assets in a manner that allows them to stay intact and perhaps even grow over a number of generations.

Your first thought would be that this is quite simple. Assets properly invested are going to appreciate. Plus, each generation will have an opportunity to add to the family fortune. As assets are passed on from generation to generation there is no particular reason why the sum total should decrease.

This may be a logical line of thinking if death taxes did not exist.

In the United States we have a federal estate tax that carries a 40 percent maximum rate. This tax is unified with the federal gift tax, and this levy carries the same top rate. As a result, you cannot give away assets while you’re living in an effort to avoid the estate tax. This has been true since 1924 when the gift tax was first implemented.

The estate tax was first enacted in 1916. Subsequently, John D. Rockefeller gave much of his wealth to his son before he passed away to avoid the estate tax. You have to think that he was not alone among wealthy individuals at the time. The gift tax was enacted to close this window of opportunity.

At the present time the amount of the federal estate tax exclusion is $5.25 million. If you do nothing to position your assets in a tax efficient manner anything that you try to pass along that exceeds this amount is subject to the federal estate tax and its 40 percent maximum rate. New York State also has an estate tax- it charges a tax on an estate that is greater than $1,000,000. In determining whether your estate is greater than or less than the exemption amount, the government includes everything you own, including the value of your life insurance policies and the value of your home.

Legacy wealth planning is going to involve the implementation of estate tax efficiency strategies. These strategies will mitigate your estate tax exposure.

Legal devices that are utilized to this end would include charitable lead annuity trusts, generation-skipping or dynasty trusts, family limited partnerships, grantor retained annuity trusts, qualified personal residence trusts, and asset protection trusts.

Reacting to the estate tax is certainly a large part of what legacy wealth planning is all about, but this is just part of the equation. You may want to consider the proclivities and personal circumstances of the people who are going to be receiving inheritances from you. Those who are not good money handlers, minors, and people with disabilities can all be provided for in the appropriate fashion.

This is just a brief look at legacy wealth planning. If you would like to learn more, contact our firm to request a free consultation.

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With a generation-skipping trust you can keep more of your hard-earned resources in the family for a longer period of time.

Why would there be any need to utilize an estate planning device like a generation-skipping trust to preserve your wealth? The answer can be broken down to three words: the estate tax.

We have a federal estate tax that is imposed on assets that you are transferring that exceed $5.25 million. The maximum rate of this tax is 40% in 2013. While New York estate tax is imposed on assets being transferred that exceed $1 million, with a graduated tax rate that caps at 16%. This tax is often criticized because people say it is an instance of double taxation. They say that the estate tax is levied on assets that are left over after taxes have been paid on earnings.

In fact, this description may not go far enough. The estate tax can be imposed over and over again as assets are passed from generation to generation, so the same assets can be taxed multiple times.

By conveying assets into a generation-skipping trust you can slow this process down considerably. With these devices you skip a generation and name your grandchildren as the beneficiaries.

Your children can benefit from assets that have been placed into the trust, so you are still providing something for them. However, they never own the assets outright so there is no estate tax imposed on that generation.

When they pass away the beneficiaries of the trust assume ownership of the assets. This transfer is taxable, but you facilitated the avoidance of one imposition of transfer taxes by creating the trust.