ACTEC Estate Planning Essentials

Gift Tax, the Annual Exclusion and Estate Planning


Gift tax, annual exclusion amount, and estate planning are interconnected because they all revolve around the transfer of assets. The annual exclusion allows individuals to gift a certain amount of money each year without incurring a gift tax, which can be strategically used in estate planning to reduce the taxable value of one’s estate, ultimately minimizing estate tax liability upon their passing.

ACTEC Fellows Jean Gordon Carter and Janice L. Davies answer commonly asked questions regarding giving someone a gift of money or assets. Understand when gift tax comes into play, how the recipient’s age impacts the tax, efficient ways to transfer property, split gifts, the annual exclusion and more.

Jean Gordon Carter
Experts explain gift tax, the annual exclusion amount, efficient ways to transfer property and minimizing the estate tax liability when gifting assets.
Janice L. Davies


I’m Jean Carter an ACTEC Fellow from Raleigh, NC and I have with me…

I’m Janice Davies also an ACTEC Fellow from Charlotte, NC.

What is Considered a Taxable Gift

Jean Carter:  We’re going to talk about gifts. Janice, tell me first, what is a gift?

Janice Davies:  It’s a transfer of property and it’s a transfer property from one person to another; and in that case, they didn’t pay any value for it. So, it could be that they just so-called “paid a dollar for it,” so it’s a transfer in value that is insufficient.

Jean Carter:  So, if I transfer something to you and you give me a dollar, then I have made a gift of the value above the dollar?

Janice Davies:  That’s right. That’s exactly right. So, if you transfer something worth $100 and you paid $1 for it, then you made a $99 gift. Absolutely.

Jean Carter:  Fair enough. Well, I’ve got kids and I pay a lot of money toward them. They’re still in grade school. Is that a gift? It feels like it.

Janice Davies:  It feels like a gift but it’s not. In that case, it’s legal support for a minor child in that example, so that is not a gift (Transferring Assets to a Minor Child).

Jean Carter:  Alright, well they keep wanting money and that 32-year-old would like a new car. I bought every other car she’s gotten. Is it a gift if I give her a new car?

Janice Davies:  Unfortunately, in this situation because she’s now 32, she’s outside the support standards. So, that means you would be making a gift by buying that vehicle for your daughter.

Jean Carter:  What if I just lend her the money to buy the car? You know, she doesn’t have to repay it.

Janice Davies:  Yes. A lot of times people think about that; let me make a loan that you don’t need to repay. Often that will be characterized as a gift or even to the example that they don’t charge interest — it could be the foregone interest is imputed as income.

Jean Carter:  Okay. It’s not sounding good. Well we also own a condo that she’s living in. Does that mean there’s a gift somewhere in there?

Janice Davies:  So usually what you look to is the foregone rent. So if you’re charging her rent, then it’s not a problem; but if she’s living there not paying any rent, than the amount of the rent — that’s fair market value rent– in that case, that’s going to be the gift.

Structuring Gifts to Family and Friends

Jean Carter:  Okay. Now that I know I’m making gifts, what should I be doing to maybe structure them a little better so they work better?

Janice Davies:  Well, I think that you have to think about – each of us can make a gift of $15,000 a year to someone and that’s something called the Annual Exclusion (Gift Tax Exclusion). So, we can count that. If you’re married, then you and your spouse can each give $15,000 in that example. So up to the total of $30,000 to that child. But if you make more than that, in this example, then that means you’re going to be filing a gift tax return.

When to Use a Gift Tax Return

Jean Carter:  So, my husband and I have two children, so we can give each of our children – together – $30,000 a year. So, we can give $60,000 a year without having a gift tax return or a gift tax effect?

Janice Davies:  Well, that’s correct. Just be careful about how you structure the gifts because if it turns out that for example, you write all the checks – it’s coming from your account, then you may have to file a gift tax return. And I mean report that as a split gift – and that means you have to split the gift and file a return for that reason.

Jean Carter:  Fair enough on that. Well, my daughter is going to med school and she wants me to pay that tuition. Could I do that?

Janice Davies:  As long as you pay that tuition directly to the university. That’s called a qualified transfer. Sometimes people look at that as a tax-free gift, if you will, because as long as you make the check directly to the university, then you’re fine, and it can be unlimited amounts then.

Jean Carter:  Sounds good on that one. What about for her medical insurance or for surgery or something?

Janice Davies:  So, what you do with the surgeries, for example, is you pay the actual check directly to the hospital. So, when you think about those kinds of things, you think, again, that’s another qualified transfer. Again, a tax-free transfer, but you can’t write the check to your daughter. You have to write the check directly to the hospital or doctor in that example.

Jean Carter:  Fair enough. That gets me a long way down the road, but you know, this child still needs money — $100,000; she needs it. How do I get it to her? Is it a gift?

Janice Davies:  It is a gift in that case, and there may be a gift tax return that you have to file and that’s something that you can do with your accountant or CPA, but know that you still again have that $15,000 per donee that you can do. But also from there, you’re not going to have a tax in this example because you have an $11.58 million-dollar exemption (a.k.a. lifetime gift tax exemption) right now. So, most of us don’t have that estate or gift tax matter right now. So, in that case you’ll have a return to file, but you’ll have no tax due.

Jean Carter:  Sounds good. Am I correct that if I am planning for my estate, I might use gifts along the way to help with that planning? You know, if I had that, imagine, $11.58 million-dollar estate?

Janice Davies:  Yes, you would. Gifting is always something that could be partly considered for estate planning purposes. It’s true — a lot of our folks like to see the children do well while we’re living and not wait till we pass away. So yes, gifting is often part of a plan.

Jean Carter:  And now the true confession. You know that $100,000? It happened two years ago. What do I do?

Janice Davies:  Well, it’s okay. You have to file a gift tax return. So go ahead and do it now. And the best thing about doing it now is that you don’t leave it for the folks you leave behind. So, when you pass away and you didn’t do that gift tax return, then it is going to be your executor or personal representative that must file it, even if it didn’t get filed by you. So, go ahead and file it now. Then you take that burden off their plate.

Jean Carter:  Fair enough, then. It sounds like gifts are a good thing to do for the family and if you’re smart about them, they can be done in some very tax-effective, good ways. Janice, thank you for talking with us.

Janice Davies:  Thank you.

ACTEC Estate Planning Essentials

ACTEC Fellows provide answers to frequently asked trust and estate planning questions in this video series.