How to Reduce Gift Taxes Transferring Wealth Parent to Child

11.20.2015

Parents can transfer substantial amounts of wealth, free of gift taxes, to their children every year through the use of “annual exclusion gifting.” For 2015, the annual exclusion amount is $14,000. It follows that an individual can gift free of tax, up to $14,000 per donee, per year. To illustrate, a parent with three children can transfer a total of $42,000 to them, free of federal gift taxes. However, if the annual gifts exceed $14,000, the excess amount over the exclusion is taxable. Gift-Splitting by Married Taxpayers Married couples can transfer even more money, tax-free. Gifts to children made during the year can be treated as “split” between the husband and wife, even if the gift is only given by one of them. Accordingly, and by “gift-splitting,” a married couple can presently transfer to each child up to $28,000 a year ($14,000 per spouse). Indeed, the more beneficiaries that qualify for the annual exclusion, the more opportunity to consistently remove wealth from the taxable estate. To illustrate, a married couple with two married children can currently transfer tax-free a total of $112,000 to their children and the children's spouses. Gifting to a Trust: The “Present Interest” Requirement As an alternative to making gifts directly to a child, parents may gift to a Trust designed for the benefit of their children. In general, Trusts provide a myriad of tax and asset protection benefits; moreover, they protect against inexperience. To qualify a gift for the annual exclusion, it must constitute a transfer of a “present interest.” This means that the donee’s enjoyment of the gift must be immediate (as in the present) and not delayed until a date in the future. When gifting to a Trust, the Trust must allow each beneficiary a limited right of withdrawal for a reasonable period of time. Typically, 30 days is sufficient in this setting. Lifetime Credit for Taxable Gifts Finally, it is noteworthy that gifts which exceed the annual exclusion amount of $14,000 may not ultimately result in any tax liability. This is because, in addition to the annual exclusion, each individual has a lifetime credit from the federal gift tax of presently $5,430,000 which mirrors that of the federal estate tax exemption. The federal exemption amount is adjusted annually for inflation. In conclusion, parents can transfer significant amounts of wealth to their children by the use of regular annual exclusion gifting. Such gifting, while relatively easy to set up and administer, requires periodic attention to the tax rules as taxation pervades much of estate planning. For more information about annual exclusion gifting, or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or jgrey@genovaburns.com.

Tags: Wealth Transfer Tax PlanningAsset ProtectionIncome Tax Planningestate planningS corporationincome tax benefitstax benefitsannual exclusion giftingwealth transfertrusts and estatesgift taxesjudson steinjohn greygenova burns