Annual/Lifetime Gift Tax Exemptions

If you are in a position to exceed the lifetime exemption, then you should probably consult an attorney that is an expert in this subject. Wealth transfer can get hideously complicated.

If you exceed the annual gifting exclusion of $16,000 you need to file a gift tax return but no tax will be owed if you have enough room in your lifetime giving. Yes the donor is responsible for the tax. If you are gifting ownership in a company you should consult an attorney and hire someone to do a business valuation because you can obtain significant discounts on minority ownerships that will allow you to reduce your estate and gift more at a discounted value. It’s a great tax planning strategy. Happy to answer any questions.

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There's an entire universe of estate planning out there.

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And it’s absolutely fascinating.

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Given that in 2026 the estwte/gift lifetime thresshold is scheduled to drop... I usually reccomend to clients that they start taking this seriously when assets exceed $4M single / $8M married.

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The ever-moving target here is fairly annoying. As it is currently $11.7MM single / $23.4MM couple, there is little need for almost anyone to even know that there is such a limit. But 4/8 are numbers that a lot of “regular” people will be affected by.

Some interesting things I’ve learned:
1) gifting $16,000 from you to your child or $32,000 from you and your wife to your child requires no paperwork
2) let’s say you have $500MM and want to set your kids up in the best way possible. You’re only 50. You don’t have plans to spend all of the money before you die. You’ll usually come out better by gifting your 25 year old kid $11.7MM today, because they will pay no taxes on it. Then, they may invest it and only pay taxes on the earnings. That $11.7MM could be worth triple that by the time you die, and then everything about the $11.7MM will be subject to estate tax rather than, in all likelihood, long-term capital gains rates. The exercise is close to impossible to think about for almost all of us at the current thresholds. But there are probably quite a few folks out there that will be in the $10-20MMish range that would benefit from giving some amount now. Of course, in 40 years, the level may be even higher, and they may lose the benefit of holding it til death and granting their heirs their step up in basis. Or the step-up on basis may disappear entirely. Thanks, rule changers who get to change the rules making estate planning very difficult to know a lot about for a long time.
3) family loans exist. I’m using year-old memory from a white coat investor episode here, so please check me on it, but: you can loan family money, but there is an interest rate (IRS-dictated) and paperwork that has to be done to do it. You can craft it in such a way that you give some lump some to an heir today, and you want that sum to be just right at the amount that is going to accumulate $16,000/y in interest. Then each year, you pull the stunt from #1, but your heir-apparent writes a check for that amount back to you to satisfy the interest charge on the loan. I’m too lazy to look it up or remember if it was single-single or couple-couple transfer, but the amount at the rate at the time of the episode that I seem to remember was about $2.5MM (or in other words- you can give them a $2.5MM check today with a small contract saying the interest is due at this rate, that often, with the principle to be returned (can be never, it seemed) and then gift them the interest payment until you die). I’m obviously quite fuzzy on the details as I’m in no position to give or receive such a loan, but general premise intrigued me.
4) if you own a business, you can hire your kids and pay them then “match” their earnings put into a Roth IRA. I haven’t figured out how to employ an 18 month old in a way to justify $6,000 of compensation per year. Allowance and gifts don’t count. They have to report the income and pay taxes on it. But in terms of wealth transfer, I want to find a way to make them earn my money from me at a young age (perhaps filing papers, shredding papers at home) and toss it in a Roth IRA. WCI employs his kids as models for his webpage- a fairly brilliant strategy.

Can an irrevocable trust donate money using form 709 or is it just for individuals? I’m curious the best way to give money from a trust other than the annual gift while avoiding taxes.

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If you exceed the annual gifting exclusion of $16,000 you need to file a gift tax return but no tax will be owed if you have enough room in your lifetime giving.

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Since you are giving advice what is the penalty if you do not file a gift tax return showing an annual gift in excess of $16K?

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Can an irrevocable trust donate money using form 709 or is it just for individuals? I’m curious the best way to give money from a trust other than the annual gift while avoiding taxes.

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The irrevocable trust can only make distributions to the named beneficiaries. The caveat being is if the beneficiary has a lifetime power of appointment and the appointee is in a class of individuals that can receive a distribution under the power of appointment. Otherwise, the trust will have to make a distribution to the beneficiary and then the beneficiary makes the gift to the person (Form 709 is required if gift is over the annual exclusion). Care should be taken in this case that the initial distribution from the trust to the beneficiary does not violate the provisions of the trust.

In terms of taxes, are you talking about income or gift taxes? Gift taxes can be offset with exemption. Income taxes can be offset with distributions of principal and not income. What are the dispositive terms of the trust?

Likely none as failure to file and failure to pay penalties are based on situations where there is tax due. Unless you have already exceeded the the lifetime exclusion there would be no tax due. One of the biggest issues I see is that if you don’t file the return, the statute of limitations doesn’t start running for that particular year.

Yeah, we are pegging the sunset amount at work to be around $6.5M. I hadn't heard that we may see an increase in the annual exclusion would increase to $17,000 next year.

Agreed. This year is going to make it rocket up

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One of the biggest issues I see is that if you don’t file the return, the statute of limitations doesn’t start running for that particular year.

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Yup... we call this the "file and run" strategy.

IF you are taking discounts that are, shall we say, aggressive, file the gift tax return so the statue of limitations clock starts to run.

Especially these days where the IRS is understafed.