Why the Average Person Should Care About the Gift and Estate Tax


Whenever a new president comes to power, we hear about changes in the gift and estate tax.  But what is it and how does it affect the average person?

Well, when you earned your money, you had to pay income tax on your annual earnings.  When you invested your money and it increased in value, when you sold your investment, you had to pay capital gains on your investment.  The gift tax is a tax that is levied on you when you give your money or an asset to other people as a gift.  So let’s say you wanted to help your children put a down payment on their new home and you gave them $20,000 each in one year.  To the extent that your gift exceeded $14,000 (what is referred to as the annual exclusion) per person per year, you would need to file a gift tax return.  But would you have to pay tax?

The answer under current Federal gift tax rules is that for 2017, you can gift up to $5.49mm over the course of your lifetime.  The unused lifetime credit can be used for gifts given after your death, e.g., by will or life insurance, pension, IRAs, 401(k)s, home etc.

If a person is married, then under Federal law, a person can use his own lifetime credit and with the permission of his spouse, can use his wife’s credit as well.  If his wife predeceased him and if she filed an estate tax return, whatever remaining credit she did not use, he may use.  PLEASE NOTE:  That husband and wife can give interchangeably between them in unlimited amounts, BUT this is so only if both spouses are United States citizens.  If one is Israeli or Canadian or a citizen of another foreign country, this unlimited spousal deduction is not conferred upon them.

So you say to yourself, my children have enough of their own wealth, let me skip their generation and provide a gift to my grandchildren.  The government has caught on to the fact that you want to skip a generation of taxation, so to the extent your gift to your grandchildren exceeds your annual lifetime credit, you will have to pay a generation skipping tax.

PLEASE NOTE, that a person can extend the gifting he does by giving gifts that do not use up his lifetime credit.  Examples are:

  1. Giving to charity;
  2. Paying for someone’s health insurance, AS LONG AS you make the check payable to the health insurance company directly. Paying someone’s health care bills, again as long as the check is made payable directly to the doctor or other health care provider;
  3. Paying someone’s tuition. The check must be payable to the educational institution;
  4. As I mentioned in last week’s article, one is allowed to accelerate the annual gift for five years in contributing to a 529 College Plan. That means one person can contribute $70,000 to the 529 plan for each child without using up any of her lifetime gifting and estate tax credit.

Please remember New Yorkers, that while Federally, the lifetime credit this year is $4.49mm, currently, under New York law, the lifetime credit is only $4.186mm.  Under Federal law, a married couple can use each other’s life time credit to combine gifting if one is wealthier than the other.  Under New York law,  a couple can work out their finances to ensure that each one utilizes each of their credits most efficiently, but if one spouse dies without using his full life time credit, the wife cannot use the unused portion of his credit, as the spouse can under Federal gift and estate tax law.

In sum:  while most people think that the gift and estate tax law affects only the wealthy, there are instances where in every day gifting, it affects the average American as well.

Lenore has been practicing Trust and estate/elder for 25 years.  She has her LLM masters in Taxation, and has offices in New York and New Jersey.  You can contact her via telephone at (516)569-4671 or by email at Ldavis@lenoredavis.com.


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