How to Make Sure You Never Pay Any Gift or Estate Tax

Many people regularly make gifts to their family members without even thinking about the possibility that they might owe taxes on those gifts. In this video from the Motley Fool Financial Planning series on Motley Fool Live, longtime Fool contributor and Director of Investment Planning Dan Caplinger discusses the various dollar limits on making gifts. He also talks about what you need to do to comply with IRS rules while still avoiding gift and estate taxes when you give money to your loved ones.

Listener: You just mentioned, Dan, a lifetime limit on gifts to family members, as part of that question on lifetime charity donations. Can you elaborate on what that gift limit is?

Dan Caplinger: I can. There are a number of gift tax implications to gifts. It takes a little bit of time to run through it, so bear with me for a minute. There are different exclusions.

Basically, the idea behind the gift tax is, potentially any gift that you give to anybody is subject to gift tax. The IRS doesn't want to have to worry about what happens when Bro gives me a $20 gift certificate for my birthday. So what they did, they created some exemptions where ordinary stock, people don't have to worry about the ordinary stock.

Now the most common thing people use is called the Annual Gift Tax Exclusion. That, for 2020, is $15,000, and it says that you can give up to $15,000 to whoever you want this year, and it will not be subject to gift tax. You can make as many of those $15,000 gifts to different people as you want. Give me some, give Bro some. Fifteen grand a piece, you can make $30,000 in gifts that way. Again, it's a per person, per recipient limit. If you have a bunch of recipients, you can get a lot of money moved to other people using just that annual gift tax exemption.

If you do that, it does not count against your lifetime exemption. This is a totally separate thing. Now it's only if you make gifts above that annual amount that you have to worry about the lifetime limit. The lifetime limit as of 2020, I'm going to check my records here, $11.57 million. So what that says is, if $15,000 wasn't enough, and you want to make a really, really big gift to somebody, you can give an extra up to $11.57 million in 2020 and still no gift tax. You're going to have to file a gift tax return in that case, but there's not going to be any tax due because you have that exemption amount.

Basically, this number has gone up and up and up recently. It was as low as $1 million back in the early 2000s and that was low enough that it actually captured some estate transfers from folks that weren't necessarily super rich. But over time that's moved up, and so the impact has been that fewer and fewer people have to worry about it. But if you're in a position, like our previous questioner seem to be in, where they're sort of interested in, "Well, should I get this done?", if you do have a lot of money, then it's something that you can use to get your assets transferred to future generations without having to pay the IRS a ton of money. Because if you are subject the estate tax, not many people are, but if you are, it's a big tax. It's 40 percent. It's something that you definitely pay attention to. Again, if you're in this situation, talk to your estate planning attorney. They'll be glad to help you out, figuring out exactly how to go forward with it.