Federal Estate and Gift Taxes

Estate planning basically amounts to a way to give gifts at the time of your death. When you hear about the possibility of estate tax, you may wonder if it is possible to give the gifts while you are still alive and avoid estate taxes. This strategy worked for several years after the federal estate tax was established in 1916. However, Congress enacted a gift tax to close this loophole. Minnesota currently enforces its own estate tax but the Minnesota legislature repealed the state gift tax in 2014. Let’s look at gift tax and how it affects your ability to give tax-free gifts to your loved ones.

Annual Gift Tax Exclusion

In general, the following will not have a gift tax:

  • Gifts that are not more than the annual exclusion for the calendar year. The annual exclusion is an amount of money or property that you can give away in a year that will not have a gift tax. Currently the annual exclusion is $14,000. For example, you can give $14,000 to your child and that money will not be taxed. If, however, you gift your child $15,000, $1,000 of that gift will be taxed. The annual exclusion applies to each gift. This means that if you have ten children and in one year you give each child $14,000, none of the gifts are subject to gift tax.
  • Gifts that are for tuition or medical expenses, provided that the payment of those gifts is made directly to the educational or medical institution for someone else.
  • Gifts to your spouse.
  • Gifts to political organizations for its use.
  • Gifts to charities.

Any other gifts are subject to gift tax. The maximum federal gift tax rate of 40 percent.

Unified Gift and Estate Tax Exclusion

In addition to the annual gift tax exclusion, there is a lifetime unified gift and estate tax exclusion. The amount of this exclusion is currently $5.45 million. If you gave gifts to someone that exceeded $14,000 within a calendar year, you could still give the gifts tax-free. This can be done by using a portion of your unified exclusion. For example, if you gave your son $14,000 today, this gift could be given tax-free because of the annual gift tax exclusion.

Let’s say that you win the lottery. Your child wants to buy a $1 million house. You could use some of your unified lifetime exclusion to give him or her the $1 million that he needs to buy the house tax-free. Your total exclusion is $5.45 million. After the gift to your child, you will have $4.45 million of your unified lifetime exclusion remaining to apply to future gifts and the value of your estate as it is being transferred to your heirs after you die.

You're home free, right? You don't own $5.45 million and so this is never going to apply to you! Next time...What about Minnesota estate taxes?

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