If you’ve never heard of estate planning then you probably don’t need it. But if you’re curious (and I daresay you should be) then read on. Estate planning is simply the act of manipulating your money so that you pay the least amount of taxes when you die. Why should you care? Because if you have money or other property to leave after you die, you care whether your heirs get taxed and how much. You want them not to be unnecessarily taxed, so you plan your estate accordingly. One of the basic components of estate planning is the gift tax exclusion.
What’s the Gift Tax Exclusion?
The IRS lets you give away money each year up to a limit, tax-free. In IRS language, a gift is when you give property and expect nothing in return. It can also mean when you sell property for such a low price it’s like giving it away. Property, by the way, means money, real estate, whatever you have of value.
You can give away $14,000 a year and not pay any taxes on it. This is called the gift tax exclusion. It’s $14,000 for 2013 and goes up each year to adjust for inflation. When you give away the money, you don’t have any control whatsoever over that money anymore. It’s a true gift to whomever you want: friends, relatives, charities, you name it. Gifts to your spouse don’t even count. You can give it all to your spouse and there’s no gift tax exclusion amount at all.
The gift tax is estate planning 101. By gifting your money, you’re reducing the amount of your estate. Smaller estate = smaller estate taxes. This is transfer of wealth, which is what wealthy people do a lot of, in order to try and pay as little tax as possible. This is the job of financial advisers, by the way. They help people manage their wealth so as to preserve it and keep it from the IRS.
The Gift Tax Exclusion Only Goes So Far, Doesn’t It?
You can give and give and give up to the gift tax exclusion amount but if you’re truly very wealthy this will only reduce your estate by a comparatively piddly amount. Just think: $14,000 for ten years and you haven’t even give much away at all.
But there’s this thing called the lifetime exclusion amount, or gift tax lifetime exemption. You can exceed the gift tax exclusion all you want up to a certain amount of money. That has been set at $5 million! Once you go over that amount you’ll start paying the gift tax. Just keep a running tab with the IRS so they and you know when you’ve used up your lifetime exclusion. Use IRS form 709 for that.