Under federal gift tax laws, each individual is currently permitted to gift up to $13,000 in cash or other assets to as many donees as desired each calendar year without any gift tax consequences. In addition, if the individual is married, husband and wife may jointly gift $26,000 to each donee. These gifts are often referred to as "annual exclusion gifts" are in addition to the individual's $1 million lifetime gift tax exemption. However, unlike the gift tax exemption which may be used at anytime during an individual's lifetime (or if not used can be utilized via the estate tax exemption at death), annual exclusion gifts can only be used in the applicable calendar year. Thus, if the annual exclusions for a particular year are not used, they will be wasted.
Annual exclusion gifts can be made to donees either outright or in trust. If the gifts are in trust they may be made for the benefit of one or several donees. An annual exclusion trust for one donee is often made under Internal Revenue Code 2503(c), which requires that the donee have a right to terminate the trust assets at age 21. In the alternative, an annual exclusion trust (or "Crummey Trust") can be established for the benefit of one or several donees without the 2503(c) termination right as long as each donee (for a period of time) has a right of withdrawal over contributions made to the trust. Such withdrawal right is referred to as a "Crummey" power and allows the individual to greatly leverage his (and his spouse's) annual exclusion gifts by contributing all available annual exclusion gifts to one trust. As an example, if a husband and wife have 4 kids and 8 grandchildren (i.e. 12 donees), they can make tax-free gifts of $312,000 each year to an irrevocable trust with Crummey powers.
As with all lifetime gifts, the main benefit of such planning is the ability to remove the gifted asset from the individual's estate. At the minimum, this means the value of the asset will not be subject to estate tax at the individual's death. In addition, since the asset is out of the estate, any appreciation inures to the benefit of the donee free of estate tax. If the same asset had remained in the individual's estate, it's current value and future appreciation would be subject to estate tax prior to distribution to the donee. As an example, a father can gift an asset valued at $26,000 to his daughter in 2009 with no tax consequences. Thus, the daughter will receive the full $26,000 value. However, if the father were to instead leave the asset to his daughter under his Will in 2009, the daughter would only receive $13,000, as the asset would be reduced by an approximate 50% estate tax. This result becomes more substantial with an appreciating asset.
Therefore, it is very important that these gifts are appropriately planned for and factored into every estate plan, from the most basic to the most complicated. Overtime, making regular annual exclusion gifts can greatly reduce your taxable estate.
If you have any questions regarding this matter or any other estate planning techniques, please contact a Maurice Kassimir & Associates, P.C. Trusts & Estates attorney or e-mail us: firstname.lastname@example.org.
This amount was historically $10,000, but has been indexed for inflation since 1998.