ANNUAL GIFT TAX

EXCLUSION?
Understand the Basics of the Gift Tax, the Unified Federal Gift and Estate Tax Exclusion, and How Much You Can Gift Away without Incurring Any Gift Tax in New York

WHAT IS THE

ILANA F. DAVIDOV, ESQ. MICHAEL DAVIDOV, ESQ., CFP NEW YORK ESTATE PLANNING ATTORNEYS

There are taxes on transfers of assets in the United States. One of them is the federal estate tax. To prevent people from giving away assets while they are living to avoid the estate tax, there is also a federal gift tax in place.

ANNUAL GIFT TAX EXCLUSION

The reason why you are not taxed when you give someone a relatively modest birthday gift is because there is an annual gift tax exclusion. Most people will never pay the gift tax because of this exclusion. The exact amount of the annual gift tax exclusion is periodically adjusted to account for inflation, and even the base is always subject to change via legislative mandate. This being stated, in 2014 the amount of the annual gift tax exclusion is $14,000. You can give gifts totaling as much as $14,000 per person to any number of gift recipients per year tax-free. The total can equal any amount of money. For example, let's say that you have a big family. You have 10 children, and they are all married. You are married as well, and your spouse is alive. You have a $14,000 per person annual exclusion to utilize, and your spouse has his or her own exclusion. As a couple, you could give $28,000 to any number of individuals in a given calendar year free of taxation. So you have 10 married children. You and your spouse could give each couple a total of $56,000: $28,000 to the wife, and $28,000 to the husband. If you

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multiply this $56,000 by 10, you are looking at a significant transfer of assets tax-free each year. Even if your family is not this large, you can still use this exclusion to transfer quite a bit of money without incurring any gift tax liability. This is especially true if you take advantage of this annual exclusion over a number of years or even decades. To give tax-free gifts using the annual gift tax exclusion you are not confined to direct cash gift giving. There are various different structures utilized in the estate planning field to provide tax efficiency and asset protection. These would include family limited partnerships and irrevocable trusts. If you give a share in a family limited partnership to someone in your family you are technically giving a taxable gift. The conveyance of monetary assets into an irrevocable trust can also be an act of taxable gift giving. Many people will use the unlimited annual gift tax exclusion to incrementally fund irrevocable trusts in a tax-free manner. This exclusion can also be utilized to distribute shares in a family limited partnership tax-free.

To fully understand the situation when it comes to taxes on gifts, you have to be aware of the unified federal gift and estate tax exclusion.

ANOTHER EXCLUSION
To fully understand the situation when it comes to taxes on gifts, you have to be aware of the unified federal gift and estate tax exclusion. This exclusion exists apart from the annual gift tax exclusion. The gift tax and the estate tax are unified. There is a $5.34 million unified

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exclusion in 2014. It would be possible to give a tax-free gift in a year to an individual that exceeded $14,000. However, to do this you would be forced to use some of your lifetime unified gift and estate tax exclusion. To provide a very basic example, let's say that you gave a gift to your son in 2014 that had a taxable value of $1,014,000. $14,000 could be given tax-free using the annual gift tax exclusion that we explained in the first section. The remaining million dollars could be given using a portion of your $5.34 million unified lifetime exclusion. Once again, these are two entirely separate exclusions. As a result, there would be $4.34 million left for you to apply to the value of your estate and to any future lifetime gifts that you give that exceed $14,000 per person in a calendar year.

MEDICAL AND EDUCATIONAL GIFTS

There are two additional gift tax exemptions that we would like to highlight. It is possible to pay medical bills for someone else as a gift free of the gift tax. You can do this for any number of people, and the total expenditures can equal any amount of money. This exemption extends to the purchase of life insurance that would benefit someone other than yourself. You do have to pay the medical provider or health insurer directly. You cannot

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give a tax-free cash gift to the recipient expecting this individual to pay for medical care or insurance. There is also an educational exemption. If you wanted to pay school tuition for someone else as a gift, you could give this gift free of taxation.

CONCLUSION
There is a gift tax in the United States. It is unified with the estate tax. The lifetime unified gift and estate tax exclusion is $5.34 million in 2014. There is another exclusion that is separate from this lifetime exclusion. It is called the annual gift tax exclusion. This exclusion allows you to give gifts totaling as much as $14,000 within a calendar year to any number of recipients free of the gift tax. You would not be using any of your unified lifetime exclusion unless you gave a tax-free gift to someone within a calendar year that exceeded $14,000.

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/esta te_planning.html

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About the Authors

Ilana Davidov and Michael Davidov
Ilana Davidov, Esq. and Michael Davidov, Esq., CFP, are partners in the law firm of Davidov Law Group, P.C. Their areas of expertise include estate planning, elder law, Medicaid planning, tax law, trust and estate administration, as well as estate litigation. Together they have represented hundreds of families, creating their estate plans and helping them navigate long-term care and tax issues. Ilana Davidov has been practicing law for over a decade. Her varied professional career includes a position as a former Court Attorney for the New York State Supreme Court, Appellate Division. She has served as counsel to a Long Island firm where she practiced in the areas of estate planning and real estate. Over the years, Mrs. Davidovs experience has included serving as legal counsel to a title agency, several real estate developers, and representing over 25 lending institutions. Today, clients turn to Mrs. Davidov to help preserve their legacies and plan for the future. Michael Davidov works as an advocate for seniors and their families, executors, trustees, and beneficiaries. He practices before the Surrogate Court, Supreme Court and before Administrative agencies in matters relating to guardianship proceedings, will contests, fiduciary misconduct actions, accounting proceedings, kinship trials, proving the rights of non-marital children, Medicaid fair hearings and Veterans benefits eligibility. Mr. Davidov is an accredited attorney with the Veterans Administration since 2008, and is also a Fellow of the American Academy of Estate Planning Attorneys. Adding further to his list of accomplishments, Mr. Davidov holds a designation as a Certified Financial Planning Professional. He was selected as a Super Lawyer to the 2013 New York Metro Rising Stars List, has been designated as a King of Queens. Both Ilana and Michael Davidov are regular lecturers at public and private workshops, as well as contribute articles and interviews on topics relating to estate planning and elder. They are members of the American Academy of Estate Planning Attorneys, and the New York State and Queens County Bar Associations. They are both fluent in Hebrew and Russian. Davidov Law Group www.davidovlawgroup.com 80-02 Kew Gardens Road, Suite 605 Kew Gardens, NY 11415 Phone: 718-793-7000 Fax: 718-793-7222

What Is the Annual Gift Tax Exclusion?

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