Home Estate Planning Gift Laws and Taxes Made Simple

Gift Laws and Taxes Made Simple

by My Journey to Millions
pile of cash

Most people just assume they can give away whatever they want in any situation; that is just not true. Ignoring gifting laws and taxes can cost you and your family a lot of money!  When gifting large sums of money there are federal tax implications one should keep in mind.

Gift Tax Introduction

What is a Gift?

Before getting started, remember we are only talking about gifts.  Gifts do not have to be cash.  Any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax (Boring definition).  Just remember a gift is almost anything that was not transferred pursuant to a bona fide sale.

A gift can be a transfer of a private or public company, a transfer of property (either whole or in part), or even an indirect transfer like not charging your rent or forgiving a loan payment.

Annual Exclusion Amount – What is it? How Much is it?

We are going to focus on the usual situation, Non-U.S. Citizen donors and donees that aren’t married.  Every Donor can give to any Donee up to $13,000/yr (remember not only cash).  As long as the gift is under $13,000 you don’t even have a legal responsibility to even tell the IRS (unless it is a split gift).

  • Example: I have 10 children, and a growing estate (not sure how that would happen with 10 children but ignore that for a second), what can I do? I can set up a gifting strategy, probably working with a financial planner or attorney to do this, where I gift up to $130,000 of value to my children.

Two Caveats to Remember:

  1. To get your annual exclusion amount the gift must be a present interest gift.  Meaning you can’t use your exclusion amount by saying to your child, “I will give you $13K in 10 years.”  What you can do is put it into a trust and tell them they have only 30 days to access it and then the window to access the money is closed until your rules say it is open.  If they access the money the donor stops the whole strategy.
  2. Medical payments and tuition are unlimited.

Anything over $13,000 starts to eat into your Exemption Amount….my what?

What is your Lifetime Exemption Amount? How does it Affect your Credit Shelter Amount and Future Estate Taxes

I previously gave an easy way to calculate estate taxes, but as a reminder:

  • Assets
  • -Credit Shelter Amount
  • -Marital Deduction
  • Charitable Deduction
  • Taxable Estate
  • X50%ish_(depending on your state estate taxes)

Well, see that bold text, right now the Credit Shelter Amount is $3,500,000 which is why the media  always talks about anyone under that amount doesn’t owe federal estate taxes (remember you still may owe State Estate Taxes).  The government allows you to ‘use’ up to $1,000,000 of that $3,500,000 during life.

Why do you want to do use your lifetime exemption amount? Because it is the growth or leveraging of that $1,000,000 that saves you 50cents on the dollar.

What happens when you don’t have any more exemption amount left?  The donor is forced to pay 45% on each dollar above that amount!


So if you win that $8.5million in the WSOP next year, remember you might not be able to just buy everyone in your family new homes, unless you talk to a great financial planner (they aren’t all evil) or an attorney who tells you how to do it legally.  Such as buying the home in your name, and gifting the fair market value rent, and pieces of the deed with a quit claim deed.

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Financial Samurai 11/24/2009 - 12:40 pm

Love this post Evan, and very useful! Tell me more, and tell me this. Let's say I'm over the estate tax cap by $1million. Can I just earmark $1 million gift to my grandchildren and classify it as tuition?

How about if I classify the mil as a medical payments for rehabing a broken bone or something?

[email protected] 11/24/2009 - 2:26 pm


You love the estate planning stuff!

IRS isn't letting you 'earmark' future gifts. But what you can do is use your gifting dollars to fund a trust or a 529 plan (529s you can pre-fund for 5 years).

So you have 2 grandchildren, A & B – in year 1 you can put $65K into each of their 529s. You can't use your annual exclusion for those two donees until year 5, but you have removed $130k of VALUE that would have otherwise been taxable. Alternatively and I think your actual question, if A & B are in college you, kind grandfather, can write the check to Harvard for $50K with no problem and no gift tax issues.

As far as medical payments, you are paying it for the benefit of another (otherwise we are dealing with income tax deductions and medical payments) – and then if you got audited (or if your estate got audited) there would be some explaining to do.

Financial Samurai 11/24/2009 - 7:32 pm

Ah, I C. Still a little confused. Where did you get $65k/each for their 529s? Is that an arbitrary number you are using?

I'm talking 1 meeeleon dollars for education, so I don't have to pay tax!

[email protected] 11/24/2009 - 11:16 pm


Lets ignore 529s for a second (no I wasn't using an arbitrary number I was using annual exclusion – $13K – and prepaying up to 5 years of gifts = 65K) in order to get the unlimited tuition you need to pay the school directly not just earmark some money and swear the IRS thats what you were going to use it for.


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