The federal gift tax affects your estate plan because the amount of your lifetime gifts reduces your estate tax exemption. Your lifetime giving and your estate planning for gifts after you pass away are connected by federal tax exemptions. With careful planning, you can potentially reduce the amount of taxes you pay during your lifetime and your estate pays after you pass away.
What Is the Gift Tax?
The gift tax is a tax due on gifts you make of your property to other people during your lifetime. In other words, any time you give money or assets to a friend or relative, you make a gift that could be taxed. Most California residents only have to pay gift tax on the federal level, because California does not have a state gift tax. Other states have state gift taxes that are due in addition to federal gift taxes.
Fortunately, the IRS has a gift tax exemption that applies to most everyday gifts people make. The exemption allows you to make total lifetime gifts of up to $11.18 million as of 2018 ($5.49 million as of 2017) without paying tax on the gift amounts. If you make more than $11.18 million in gifts, you will pay a significant tax on the amounts that exceed the exemption. The gift tax exemption is doubled for spouses to $22.36 million.
The IRS also has an annual exclusion amount for gifts. For 2018, you can make a gift of up to $15,000 to an individual without owing additional tax on that gift. The exclusion amount is doubled for spouses to $30,000. Gifts made that are under the annual exclusion amount do not count against the lifetime gift tax exemption.
How Is the Gift Tax Connected to the Estate Tax?
The estate tax exemption works similarly to the gift tax exemption, except that it applies on your entire estate after you pass away. The exemptions are exactly the same amounts ($11.18 million in 2018). This is because lifetime gift amounts count against your estate tax exemption. In other words, if you give $1 million in gifts during your lifetime, your estate tax exemption is reduced by $1 million.
The new tax law effective as of 2018 increased the estate and gift tax exemptions, but the law expires at the end of 2025. If Congress does not pass another increase to the exemptions by then, you could owe additional taxes if you make gifts or have an estate over $5.49 million.
People with plans to make large lifetime gifts or who expect to have substantial estates should carefully plan to reduce their gift and estate tax exposure. One method to do so is transferring some property to a trust, which is taxed differently. Consult a knowledgeable estate planner familiar with the change in law to learn more.
Want to factor gift and estate tax exposure into your long term estate planning? Angela Klenk, Esq. and the team at Beach Cities Estate Law couple personalized attention to your estate plan with big law firm experience for a winning combination to give you peace of mind. To schedule a case evaluation, visit Beach Cities Estate Law online or call Angela’s office at (424) 400-2125.