Since we are getting near the end of 2015, certain parameters that are relevant to the field of estate planning are subject to adjustments for 2016 to account for inflation. We recently passed along information about the unified federal gift and estate tax exclusion. It has been $5.43 million throughout this year, but it is going up to $5.45 million in 2016.
This is not the only the exclusion that you can use to give gifts to others in a tax-free manner. There is also an annual gift tax exclusion. Throughout 2015, the annual gift tax exclusion has been $14,000. You can use this exclusion to give as much as $14,000 to an unlimited number of gift recipients tax-free.
If you wanted to give gifts to individuals that exceeded $14,000 per person, you could start to use portions of your unified lifetime gift and estate tax exclusion.
Though the unified gift and estate tax exclusion is going up by $20,000 next year, there will be no increase to the annual gift tax exclusion. It will remain constant at $14,000 per person.
Estate Tax Efficiency
If your estate is going to be exposed to the estate tax, you could utilize the annual gift tax exclusion to transfer assets to any number of gift recipients each year tax-free. A married couple would have a total of $28,000 that could be utilized. When you use this exclusion to give tax-free gifts, you are reducing the value of your estate for tax purposes as well.
This may not sound like a great deal of money to transfer when you are in possession of assets that exceed $5.45 million, but it can add up over time. Let’s say that you are married and you have three married children. You and your spouse could give $28,000 each year to each husband-and-wife. That would be $56,000 per family, totaling $168,000 annually.
Direct gift giving is certainly an option, but people sometimes use this annual gift tax exclusion to fund trusts in a tax-free manner, and it can be utilized to transfer assets with tax efficiency if you establish a family limited partnership.
Additional Gift Tax Exclusions
Since we are examining the gift tax exclusions, we should point out the fact that there are two additional ways that you can give tax-free gifts while you are living. If you want to pay school tuition for students, there would be no tax consequences, but this is a tuition-only exclusion. It does not extend to additional costs like living expenses and books.
There is also a medical exclusion. You can pay medical bills for patients without being taxed for your generosity, and you can also purchase health insurance that would benefit others in a tax-free manner.
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