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Gifting During Life: What You Need to Know

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Many of our clients consider gifting as a strategy to complement their overall financial and estate plan.  In this week’s blog, we will outline gift tax basics, gifting strategies, and points of consideration.

Federal gift tax basics

  • Annual exclusion – Each year, individuals can give a certain amount ($14,000 in 2013) to an unlimited number of individuals free of gift taxes.
  • Qualified transfers exclusion – An unlimited amount may be gifted on behalf of any individual for tuition or medical expenses free of gift taxes. The gift must be paid directly to the educational or medical care provider.
  • Applicable exclusion amount – Gifts can also be sheltered by the applicable exclusion amount, which can protect gifts of up to $5,250,000 (in 2013).  This limit applies to all taxable gifts made during life and through the estate at death for federal estate tax purposes.  No gift taxes are applicable unless more than $5,250,000 is gifted during your lifetime.
  • IRS Form 709 – The United States Gift (and Generation-Skipping Transfer) Tax Return form must be filed when an individual makes gifts to any one person that exceed the annual $14,000 exclusion gift limit. 


Which Gifting Strategy is Right for You?

Most experts would agree that the first gifts to consider should be classified by either the annual exclusion rule or the qualified transfers rule.  Annual exclusion gifts may be made to anyone for any purpose and the exclusion privilege is lost in any year in which it is not used. Unlimited amounts of gifts may be made using the exclusion for qualified transfers, but gifts are limited to educational and medical purposes.  It is also important to note that spouses can make use of unlimited gifts to each other.

An individual and their spouse have the opportunity to split gifts made during the calendar year.  Doing so allows a married couple to effectively use each other’s annual exclusions and applicable exclusion amounts.  For example, if you have two children, you and your spouse could make annual exclusion gifts totaling $56,000 to your children (2 spouses x 2 children x $14,000).  If you make gifts of $56,000 for 10 years, you will have transferred $560,000 to your children gift tax free.  The key point regarding gift splitting is that each spouse must consent to splitting of the gift on IRS Form 709.

A special provision in the federal gift tax guidelines addresses 529 college plan contributions. The rule allows an individual to give a lump sum gift that is then spread over 5 years for tax filing purposes. This can be done without affecting the lifetime gift tax exemption or the estate tax exemption.

After the previous gifting strategies have been explored, consider gifts that are sheltered by the applicable exclusion amount.  Remember that use of the applicable exclusion amount during life reduces the amount available for estate tax purposes at death. We are prepared to speak with you about gifting options as well as your overall estate plan.


wisdom wealth strategies

Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.

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