One way to transfer wealth to the next generation is to make gifts. Generally, donors pay gift tax unless they fit into an exception. The most frequently used exception is the annual exclusion.
Taxpayers may give up to the annual exclusion of another individual tax-free. In 2019, this amount was $15,000. For example, if John wishes to give his four children $15,000 each, he can do so with no tax implications.
What’s more, if John is married, his wife could also give their four children $15,000 each. This way, they can transfer $120,000 to their children tax-free each year. Not only that, but they could each give their eight grandchildren $15,000, to transfer a total of $360,000 ($15,000 x 2 x 12 = $360,000).
The $15,000 gifts are completely tax-free and do not require the taxpayer to file a gift tax return. If John makes the full gift, and Anne agrees to the gifts, they can do what is called “gift splitting.” With gift splitting, a married individual is considered to have given half of the total gift, assuming the taxpayer’s spouse consents. If the taxpayers either gift split, or give more than $15,000 to anyone donee, then they must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Filing a gift tax return does not mean the taxpayer has to pay a tax. Each taxpayer has an amount they can pass through as gifts or transfers at death. Each taxpayer can pass up to $11,400,000 before they have to actually pay estate or gift tax.
* Each year, the annual gift tax exclusion amount and the maximum gift limit may change according to Internal Revenue adjustments. Please call our office for preplanning so we can determine what your exclusion is for the specific year you are looking to gift monies. This way you can maximize your tax benefits.