You may hear that there is a federal gift tax that is unified with the estate tax. This is true. There is a unified exclusion or credit. It could be said that this is the amount that can be transferred before taxes would kick in.
In 2014, the amount of the annual gift tax exclusion in Hartford Connecticut is $5.34 million.
However, to fully understand your ability to give gifts in a tax-free manner, you need to understand a different gift tax exclusion that sits apart from the unified gift/estate tax exclusion.
Annual Gift Tax Exclusion in Hartford Connecticut
In the United States we have an annual per person gift tax exclusion. If you give gifts that stay within this annual exclusion amount, you are not using any of your lifetime unified gift/estate tax exclusion.
The amount of this exclusion is $14,000 per person, per year. This means that you can give any number of gift recipients as much as $14,000 each within a year free of the gift tax.
If you gave one person more than $14,000 within a year and you didn’t want to pay the gift tax on the taxable portion, you could use some of your unified lifetime exclusion to give the gift tax-free.
Because this annual gift tax exclusion is allotted to each individual taxpayer, if you are married you are looking at a total of $28,000 that could be given to an unlimited number of people each year tax-free if you combine your exclusion with that of your spouse.
This can be quite relevant for people who are in possession of assets that exceed $5.34 million. They would logically be looking for ways to divest themselves of assets in a tax-free manner in an effort to mitigate estate tax exposure.
To provide an example, let’s say that the value of the estate that lies in wait for your heirs is $7.34 million. $2 million is potentially taxable, because this is the amount that exceeds the lifetime unified exclusion.
As you give gifts each year using the annual $14,000 per person gift tax exclusion, you are reducing the value of your estate as you are transferring assets to your heirs while you are still living in a tax-free manner.
Let’s say that you have four children, and all them are married. You and your spouse could give $28,000 tax-free to each husband and each wife each year. This is $56,000 multiplied by four, or $224,000.
Using this approach, in less than 9 years you would have transferred all of that taxable $2 million to your children tax-free.
You can use the annual gift tax exclusion to give direct cash gifts. However, it can also be used to distribute shares in a family limited partnerships free of taxation. This exclusion can also be utilized to incrementally fund various types of irrevocable trusts without incurring any gift tax exposure.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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