Each year, taxpayers have the opportunity to transfer assets free of gift taxes to their family members or other individuals by using their annual exclusions from the federal gift tax. As long as the gifts remain within the annual exclusion amounts, the value of the assets gifted will not reduce any remaining portion of a taxpayer’s exemption from federal gift and estate tax. Thus, making gifts with the proper use of the annual gift tax exclusion decreases one’s taxable estate at death (and the corresponding federal estate tax payable) without using any of the taxpayer’s available credit against potential gift and estate taxes.
The annual exclusion amount for 2013 is $14,000 (a $1,000 increase from last year) or twice that amount, $28,000, for a married couple. The exclusion covers gifts that an individual makes to each donee in any given year. Thus, an individual taxpayer with two children can transfer a total of $28,000 to those children every year ($14,000 per child), or a married couple can transfer up to $56,000 to the children every year without eroding their gift and estate tax exemptions. Gifts can be made to as many individuals as desirable there is no limit. The key to qualifying a gift for the annual gift tax exclusion is to ensure that the donee receives a “present interest,” which is the “unrestricted right to the immediate use, possession, or enjoyment of property or the income from property,” according to Reg §25.2503-3(b).
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