The federal estate tax and the gift tax are unified. There is a unified $5.25 million exclusion in 2013.
As a result, you could give $5.25 million in taxable gifts throughout your life without incurring any gift tax liability. However, if you did this all of your estate would be subject to the estate tax.
Aside from this $5.25 million unified exclusion there are some additional gift tax exemptions. Each taxpayer can give gifts to unlimited numbers of individuals each year that do not exceed a certain amount per gift.
In 2012 this amount was $13,000, but it has been raised to $14,000 in 2013. So, a married couple could combine their exemptions to give us much as $28,000 to any number of recipients this year tax-free.
People who are exposed to the federal estate tax may want to consider taking advantage of this annual exemption by giving gifts over an extended period of time. It should be noted that the gifts do not have to be direct cash gifts; this exemption could be used to incrementally fund certain types of trusts or distribute shares in a family limited partnership.
There are a couple of other exemptions that you should be aware of as well. If you wanted to pay for health insurance as a gift to someone you could do that without incurring any gift tax liability. You could also pay medical bills tax-free as a gift.
There is also a school tuition exemption. You can pay the tuition of any number of students equaling any sum of money without receiving a tax bill. But, this is a tuition only exemption and it doesn’t extends to books, fees, dorm expenses, etc.
Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.