Annual exclusion giving is a great way to make tax free gifts during your lifetime. Annual exclusion gifts must be made before December 31, so now is the time to make your 2013 annual exclusion gifts if you haven’t already done so!
The annual exclusion amount is the maximum amount that you can give to any single recipient during a calendar year without incurring gift tax and without utilizing any portion of your Gift Tax Exemption. For 2013, the annual exclusion amount is $14,000 (or $28,000 if you and your spouse choose to “split” gifts). In addition to annual exclusion gifts, you may make tax free “gifts” to your family members and others by paying their tuition and medical expenses. These payments will not count against your annual exclusion amount or Gift Tax Exemption as long as they are made directly to the school or health care provider.
Annual exclusion gifts can be made to anyone, although children and other descendants are the most common recipients of these gifts. Annual exclusion gifts can also be made to certain trusts and 529 plans instead of being made outright to an individual. Further, if the recipient has earned income, he or she could use a portion of your annual exclusion gift to fund a Roth IRA, which would allow those funds to grow income tax free for the recipient’s lifetime.
The annual exclusion amount applies to each person to whom you make a gift. For example, if you decide to make gifts of the full $14,000 annual exclusion amount to 10 different people this year, you can remove $140,000 from your taxable estate without paying gift tax or using any of your Gift Tax Exemption.
In addition, when you make a gift of an asset that may increase in value, any future appreciation and income that the asset generates will also be removed from your estate, thus increasing your tax savings. Accordingly, in 2014 and beyond, you should consider making annual exclusion gifts in January rather than waiting until the end of the year, if possible.
The annual gift tax exclusion amount does not carry over from year to year, so annual gifts must be made by December 31 or they will count against your 2014 annual exclusion amount. For more information on annual exclusion gifts or any other matter raised in this Legal Update, please contact Donna E. Morgan, Richard A. Campbell, James A Casey, Barbara A. Grayson, Daniel W. Luther, Donald C. Morris, Emily Petrovic Li or your Wealth Management attorney at Mayer Brown LLP.