Annual gifting can aid estate planning

annual giftingThe annual gift tax exclusion is a simple yet effective tool for reducing estate taxes. In fact, according to IRS statistics for last year, more than $9 billion dollars was gifted using this approach and best of all, no taxes were owed.

Despite its benefits, many taxpayers remain unaware of the ins and outs of gifting and how to best leverage it to help with their own estate plans.

Why might you consider a gifting strategy? While some restrictions may apply, gifting generally allows the donor to remove assets from their estate when they pass away. This can be particularly powerful when it comes to assets that are expected to appreciate significantly over time or as a strategy to ensure that they remain below estate tax thresholds.

Gifting can also provide a mechanism to transfer assets to family members who might be in a lower tax bracket.

In addition, some taxpayers may prefer to gift during their lifetime because of the personal satisfaction gained by watching beneficiaries enjoy their gift today.

Limit raised for 2013

The annual gift exclusion represents the amount that an individual can give to another person each year without having to file a gift tax return or pay any gift taxes. For 2013, the annual gift exclusion has been raised from $13,000 to $14,000 per person.

Married couples have the ability to combine their gifts, also known as “gift splitting,” which would allow for up to $28,000 to be gifted to each recipient. Gift splitting requires a gift tax return be filed to confirm that both spouses agreed to split the gift. Consider reviewing form 709 and IRS Publication 950 — Introduction to Estate and Gift Taxes for additional information.

In addition to federal rules, you must also be cognizant of state rules that apply to gifting.

“While New Jersey does not have a gift tax, it does have provisions for gifts in contemplation of death if made three years before death,” said estate planning attorney Robert Muñoz of Lomurro, Davison, Eastman and Muñoz. “The gift may be subject to estate tax and/or transfer inheritance tax during that three-year period,” he said.

Do not assume there is consistency between federal and state laws as they pertain to gifting and estate taxes.

Additional gifts

While gifts can be made in excess of the $14,000 limit for 2013, you will have to file a gift tax return. Keep in mind, federal gift tax is generally owed only when the cumulative gifts above the lifetime gift tax exemption of $5.25 million are made. As a result, many people will not ever be subject to gift taxes. However, if gift taxes are due, they are paid by the donor, not by the recipient.

Gifts in excess of the annual exclusion should be made only after consulting a tax or estate planning attorney.

There are a few circumstances where gifts can be made in excess of $14,000 without counting against your lifetime gift exemption. These generally apply to medical care and education. When leveraged properly, these options can provide a great opportunity for excess gifts that are free of taxes.

Muñoz adds, “Gift taxes do not apply to payments for medical care, provided they are considered permitted expenses. Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, prevention of disease, for the purpose of affecting any structure or function of the body, for transportation primarily for and essential to medical care and even for medical insurance on behalf of any individual.”

In addition, educational expenses may be paid without having to worry about annual gifting limitations. Keep in mind, payments are required to be made directly to the institution.

Finally, there is a special election that can be made that pertains to education savings through a 529 plan.

For 2013, up to $70,000 ($140,000 for married couples) can be contributed at one time to a 529 plan by accelerating five years' worth of contributions as gifts. Utilizing this election can help parents and grandparents get a big jumpstart on education funding.

While gifting can be a powerful estate planning strategy, you should be careful to ensure that you will continue to have sufficient resources to meet your financial needs over time. In addition, significant tax and estate planning implications may exist. Since everyone’s situation is unique, consider speaking to your tax, legal and financial adviser to determine the most appropriate strategy for you.


Kurt J. Rossi, MBA, is a certified financial planner practitioner. He can be reached for questions at (732) 280-7550 or