Annual Exclusion Does Not Eat Into Lifetime Exclusion.

We had a reader ask the following question:

“Am I correct in that this accumulation of gifts during lifetime does not include those under the Annual Gift Tax Exclusion ($13,000)?”

It seems like most of my posts lately deal with estate and gift taxes, but this is a very important subject and with the end of the year less than two weeks away, we do not have much time to make major gifts.

As the question indicates, there  is both an annual gift exclusion amount and a lifetime exclusion amount.  These two items are mutually exclusive.  This means that any gifts  that fall under the annual exclusion amount will not reduce your lifetime exclusion totals. 

For example, in 2012, the annual exclusion is $13,000 which increases to $14,000 in 2013.  The  current lifetime is $5.12 million scheduled to drop back to $1 million on January 1.  If a married farmer has five children and ten grandchildren, he can give 15 gifts of $13,000 each to each child and grandchild or $195,000.  The wife can give the same amount.  This equals a gift of almost $400,000 in one year that still leaves their lifetime exclusion amount at the same balance. 

That is why we are able to transfer substantial amounts of land values to our heirs during lifetime by using appropriate discounts on LLC or LLP interests AND the annual exclusions.  In the above case, if the land was in an LLC and it was subject to a 35% discount, the farmer could gift $300,000 and his wife the same in gross land values and it still would not eat into his or her lifetime  exclusion.

Over time, the proper use of the annual gift exclusion amount can be extremely more valuable than the use of the lifetime exclusion amount.

Paul Neiffer, CPA