Under federal law, a person can make a gift or gifts to anyone without having to file a gift tax return if the total calendar-year amount of the gifts to that person is under $14,000. But do such gifts really matter anymore now that the estate tax exemption is $5,340,000?
The gift tax exemption as designed generally applies to gifts to children. When a person pays for the child’s support and education while a minor, such payments are not treated as taxable gifts under federal law. A gift of a sweater or cash for Christmas or a birthday, for example, is normally treated as a gift. If valued under $14,000, such gifts are exempt from the obligation to file a gift tax return. Thus, an annual exclusion gift can definitely be a plus because it avoids the cost and hassle of filing a gift tax return.
Another plus of annual exclusion gifts is that they do not use up any part of the estate tax exemption of $5.34 million. Thus, if a gift were made in 2014 for $14,000, the estate tax exemption of $5.34 million would remain. But a larger gift of, say, $18,000 would consume $4,000 of the estate tax exemption, reducing it to $5.336 million.
In the past, parents would often attempt to leverage the amount of annual exclusion gifts to their children. So if a husband and wife had three children, they could each gift to each child $14,000, for a total gift, all subject to the annual gift tax exclusion, of $84,000 (two parents × three children × $14,000). This is certainly a substantial amount of money. But compared to the estate tax exemption of $10,680,000 ($5,340,000 each for husband and wife), it is only .079 percent of the total exemption. If a $10.68 million estate is composed of real estate, stocks, and bonds, it is likely over the long run to be growing at a compound annual rate of perhaps 7 or 8 percent. Thus the problem with making a smaller gift is that it does not do much to reduce estate taxes for those who have larger estates. Such an estate will continue to grow far faster than it can ever be reduced by annual exclusion gifts.
Most of us will never see our estate exceed $5.34 million (adjusted for inflation), and thus there is no need to worry about federal estate taxes. In Oregon and Washington, the state estate tax exemptions are at $1 million and $2 million, respectively. There is no Oregon or Washington gift tax, so unlimited gifts can be made without triggering an Oregon or Washington gift tax. For those who have an Oregon estate in excess of $1 million, but less than the federal $5.34 million exemption, any gift will reduce the Oregon estate taxes at death. The sole advantage of making a smaller gift within the $14,000 annual exclusion, however, is simply to avoid filing a gift tax return. In fact, many clients stick to gifts using the $14,000 annual exclusion amount, since it is a number that they can grab onto. But it is generally too small a gift to save an appreciable amount of federal or state estate taxes.
If a couple did have a larger estate, one that was over $10.68 million, the savings in federal and state estate taxes from making an annual exclusion gift of $14,000 will often be equal to 50 percent or more of the amount of the gift. The difficulty is that it will generally take a much larger gift, or utilizing other estate planning techniques, to significantly reduce the overall estate tax bite.