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WHAT IS THE ANNUAL GIFT TAX EXCLUSION? Understand the Annual Gift Tax Exclusion in Ohio and Mitigate Your Estate Tax Exposure

Barry Zimmer ● Estate Planning Attorney ● The Zimmer Law Firm ● 513-721-1513


There is a federal estate tax to contend with if you have been particularly successful throughout your life. During 2014 the amount of the federal estate tax exclusion is $5.34 million. You can arrange for the transfer of assets equaling as much as $5.34 million before the estate tax would be applicable. The maximum rate of the federal estate tax is 40 percent.

“Why not just give gifts while you are living to avoid the estate tax?“ ●

When you hear the above you may have an idea: why not just give gifts while you are living to avoid the estate tax? This is the same idea that wealthy people had back in 1916 when the estate tax was enacted. At first, people did in fact give away assets to their heirs to avoid the estate tax. The tax man was not keen on this idea, so a gift tax was enacted in 1924 to close this loophole. It was repealed for several years, but it returned to stay in 1932. In 1976 it became unified with the federal estate tax.

Unification of Federal Gift and Estate Tax This $5.34 million exclusion that we touched upon in the first section is a unified exclusion. It applies to the taxable gifts that you give while you are living coupled with the value of your estate as it is being passed on to your heirs. To paint a simple picture, if you gave away $5.34 million during your life tax-free using the unified exclusion, the entirety of your estate would be subject to the estate tax. You would have used all of your unified transfer tax exclusion giving gifts.

Annual Gift Tax Exclusion Using the unified transfer tax exclusion to give tax-free gifts while you are living will just delay the inevitable. However, there is another gift tax exclusion that you can use that will provide tax savings.

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In addition to the unified gift tax exclusion, there is also an annual per person gift tax exclusion. You can give gifts up to a certain amount to an unlimited number of gift recipients each year free of taxation. In 2014 the amount of this annual gift tax exclusion is $14,000. You would not be using any of your unified lifetime exclusion to give gifts to any particular person during the calendar year unless it exceeded $14,000. This exclusion is allotted to each individual taxpayer. Because of this you have a $14,000 annual exclusion, and your spouse also has a $14,000 annual exclusion assuming you are married. As a couple you could give as much as $28,000 to any number of people within a calendar year free of the gift tax. If you are trying to reduce the amount of your taxable estate while you transfer assets tax-free, this would be an avenue to explore. Since the unified lifetime exclusion is $5.34 million, an annual gift tax exclusion of $14,000 may not sound like much. However, using this exclusion over a number of years can indeed have an impact. Because a couple could give $28,000 tax-free to any number of individuals, you and your spouse could transfer $56,000 annually to say your daughter and her husband. If you have multiple children and perhaps married grandchildren that you would like to give gifts to, utilization of the annual gift tax exclusion could actually be quite effective as part of a tax efficiency strategy. Direct gift giving is not the only way to utilize this annual gift tax exclusion. Many people who are interested in asset protection and tax savings will utilize the structure called the family limited partnership.

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The person creating the partnership is typically going to act as the general partner. The general partner can distribute shares in the partnership to limited partners. The limited partners must be family members. If you give a limited partner a share in property that has been conveyed into the partnership, you are giving this individual a gift that is potentially taxable. However, you could utilize the annual gift tax exclusion to give gifts of partnership shares that are valued within the amount of the exclusion each year. These gifts would be tax-free. The annual gift tax exclusion can also be used to fund various types of irrevocable trusts in a tax-free manner.

Conclusion Gifts that you give are taxable, but there is a unified lifetime exclusion. This exclusion applies to lifetime gifts coupled with the value of your estate. The amount of this exclusion is $5.34 million in 2014. There is also an annual gift tax exclusion. The amount of this exclusion is $14,000 per person. You can give gifts equaling as much as $14,000 to any number of individuals within a year tax-free. This annual gift tax exclusion exists completely apart from the unified gift and estate tax exclusion. You do not use any of your unified lifetime exclusion unless you give a taxfree gift to someone within a calendar year that exceeds $14,000 in value.

References IRS http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Gift-Tax American Bar Association http://www.americanbar.org/groups/real_property_trust_estate/resources/estate_pla nning.html

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About the author

Barry H. Zimmer founded THE ZIMMER LAW FIRM in June 1993, to practice in the areas of estate planning, estate administration, and business succession planning. His goal was and continues to be helping clients understand and de-mystify the often confusing world of estate planning in an ever-changing society, and to implement effective estate planning with minimal effort and time investment. The firm works from the belief that planning should always be driven by purpose. As a result, there are no “canned” or pre-set planning solutions. Instead, Zimmer helps clients identify their goals first and then builds estate and business plans based on that understanding. Barry has been in private practice since receiving his law degree from the University of Cincinnati College of Law in 1979. He earned his Bachelor of Arts Degree from U.C. with Honors, Magna Cum Laude and Phi Beta Kappa, in 1976. He was profiled in the 1990-1991 edition of Who’s Who in American Law for contribution to the betterment of contemporary society, and has lectured numerous times on legal topics, and authored several articles and Special Reports on estate planning. He is a former guest columnist on Simply Money, on 91.7 FM, WVXU. He makes occasional guest appearances on radio about estate planning topics, and has been quoted in newspaper articles and columns on estate planning matters. In Mr. Zimmer’s perspective, excellence in implementing trust-based estate plans is but one aspect of his responsibility to clients. Providing reliable guidance and service to families of clients who pass away is just as critical as sound planning at the front end. The firm is very active in settling trusts of all complexity and sizes, and handling probate cases and guardianship proceedings. Zimmer and his staff have successfully handled hundreds of trust estate cases, and are experienced in settling and distributing a wide variety of estate assets to heirs. Mr. Zimmer also believes strongly in continuing education. He devotes substantial time and resources to staying up to date on the latest laws, trends and techniques. Barry is also a founding member of the American Academy of Estate Planning Attorneys. The Academy is a limited membership organization that provides continuing legal education to members, and practice management support and training. The goal of the Academy is to help foster excellence in attorney member services to their clients. Zimmer has been actively involved in the Academy since its inception in 1993, including service on the Academy’s first Board of Governors and Education Advisory Board. He regularly attends specialized and advanced training by the experts in the Academy Education Department several times a year. This includes two national conferences sponsored by the Academy for its members, where Zimmer also networks with estate planning lawyers from across the country. The Zimmer Law Firm 9825 Kenwood Road, Suite 201 Cincinnati, OH 45242 www.zimmerlawfirm.com Phone: (513) 721-1513 info@zimmerlawfirm.com 5


What Is the Annual Gift Tax Exclusion?