The Gift Tax Rule Your Parents Don't Know (& how it could be costing you millions)
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Confused about how the annual gift limit works? You’re not alone.
If you’re an inheritor (or the parent of a rich kid), you may have fallen victim to this common misconception about the annual gift tax rules.
Which means you could be missing out on a MAJOR gifting opportunity.
The good news? You can pass down millions without ever owing a dime to the IRS.
In this week’s episode, I explain what the gift tax exemption actually is, how it works, and strategies to get more money to the next generation without giving anything to the IRS
Learn what you need to know about:
Gift tax returns
Gift-splitting
The lifetime gift tax exemption
So you’re never limited by this rule again.
This is the episode your parents need to hear.
🗓️ Schedule a FREE call to talk more about how I can help you navigate a current or future inheritance.
Transcript:
Hey, I'm Katherine and thanks for joining me at Heir Necessities. It's a podcast that turns complex financial topics into real talk for Gen X, Millennial, and Gen Z inheritors.
Each episode of this podcast, I break down a different topic related to generational wealth and inheritance. My goal is that you stop trying to figure out what to do with your money by asking Google or ChatGPT what to do and come here instead for real talk, real solutions, and real advice that you can start implementing in your life today.
What Is the Annual Gift Tax Exemption and Why Do Wealthy Families Misunderstand It?
On this week's episode of Heir Necessities, we are diving into the annual gifting limit. And spoiler alert, this is one of the most common things that people with a lot of money, I'm talking tens or hundreds of millions of dollars, do not understand at all.
I'm gonna say 98% of the people who are insanely wealthy that I talk to do not understand the knowledge that I'm about to drop on you in this episode. You're gonna wanna hear it because if it's not directly relevant to you, it's absolutely something that you should be educating your parents on.
Before I dive into it, if you have been enjoying Heir Necessities and have two seconds to spare, I would so appreciate it if you could leave the podcast a five-star rating wherever you listen to episodes. It's hugely helpful for the show and it helps me connect with and support more inheritors just like you.
Why Do Most Wealthy Families Believe They Can't Gift More Than $19,000 a Year?
Let's talk about what I hear all the time. A new client comes in.
They could be talking about their parent making gifts to them, or they could be talking about making gifts to their kid. And I hear over and over and over again, "I'm gifting my kids $19,000 a year, which is the maximum I am able to give."
Again, I think 95, 98% of families think that they are prohibited from giving more than that annual exemption limit because if they do, someone is going to have to pay taxes on that gift. And for the vast, vast, vast majority of people, that is not the case.
Is the Annual Gift Exemption a Tax Threshold or a Reporting Threshold?
Let's back up to explain what that annual gift exemption is. It is an amount that any individual can give to any other individual without having to inform the government that they made that gift.
So that annual exemption limit, it's not an annual exemption from taxes. It is an annual exemption from reporting those gifts, which are also not subject to taxes.
But the exemption isn't talking about a tax threshold, it's talking about a reporting threshold. So I could give $19,000 a year to five different people and I would not have to report any of those gifts to the IRS.
What Happens If You Give More Than the Annual Gift Tax Exemption Amount?
If I gave $19,000 to five different people and then I gave $20,000 to the sixth person, I would have to report that gift to the IRS. But this is the key point here.
There would not be any tax due because I gave more than the annual exemption amount.
How Does the Lifetime Gift Tax Exemption Work for Married Couples?
Every individual has what is called a lifetime gift tax exemption. And that amount is equal to the federal estate tax exemption.
The individual gift tax exemption for a non-married person is right around $15 million. And if that person is married, then their spouse and them each get one.
So that combined exemption becomes $30 million.
Do You Owe Taxes When You File a Gift Tax Return With the IRS?
In the scenario where I gave this sixth person a $20,000 gift, I do need to tell the IRS that I made that gift. But just telling them doesn't mean that I will pay any tax.
What it means is that I file an informational return with the IRS telling them that I exceeded the annual gift exemption. And those annual returns, those informational returns, form the basis when I die of reducing my lifetime gift tax exemption, which again, right now is $15 million.
So if your parents have a $10 million estate, or even if they're married if they have a $20 million estate, they are most likely never going to have any gift tax consequences even if they gave away all of their money because again, their total estate, that $20 million, is under the current federal estate tax exemption of $30 million, which again is also the lifetime gift tax exemption.
Why Are Wealthy Parents Not Actually Constrained by the Annual Gift Limit?
This concept is a little bit confusing and it's difficult to understand. But the core, core, core piece you need to know is that your parents, or you if you are a parent, are not constrained to giving that annual exemption amount.
There are many ways that you can give more than that, and in fact could give up to $15 million as an individual before there are any tax consequences to you. You do need to remember to tell your CPA about those gifts when it's time to file your taxes so that they can file that informational return and everything stays compliant with the IRS.
But again, that's all it is.
What Happens If You Gift Millions of Dollars to a Friend or Family Member?
If I gave my best friend $3 million tomorrow, I would file an informational return with the IRS. It would be added to my tracking, added to my folder.
I don't know if they have folders at the IRS. But that would be it.
I wouldn't have to pay any tax.
How Can Married Couples Use Gift Splitting to Double the Annual Exemption?
This is the first piece that you need to understand. The second piece is that there are ways to increase that annual exemption gift without going against that lifetime gifting maximum.
And the best way that this can be done is for a married couple to elect to gift together. Again, this doesn't have any tax consequences.
It does require, again, filing that same informational return with the IRS just to let them know, check the box and saying, "Hey, we're electing to split our gifts as a married couple." And what that means is that your parents, for example, instead of giving you $19,000 a year, can give you $38,000 a year.
So in effect, each of them, even though they're married, is giving you that $19,000.
How Much Can Parents Gift a Family of Four Without Tax Consequences?
And say you're a family of four, so you have two parents and two kids. Your parents could be giving each of you—you, your spouse, and each of the two kids—that $38,000.
So now you're talking about almost $160,000 of giving in a year. It does require filing that informational gift tax return, but there is, A, no tax consequence.
We've already talked about the fact that most gifts don't have a tax consequence. And B, even though your parents are giving your family almost $160,000 a year, it doesn't count against their lifetime gift and estate tax exemption because they're splitting gifts.
So technically they're making under that annual maximum gift.
Why Do So Many Inheritors and Parents Misunderstand Annual Gifting Rules?
Why does this matter? So many parents that I talk to, or inheritors that I talk to when they are telling me about what their parents are doing in terms of gifting, think that they are stuck at this annual exemption gift.
And I think to some degree this annual exemption gift is helpful because when people are saying, "How much should I give?" Well, you can give this amount of money without telling the IRS anything. So start with that.
But if your parents have expressed an interest in giving more and haven't because they don't want to deal with the tax consequences, they probably don't understand that there aren't actually any tax consequences. This is a huge misconception.
And again, most of the people that I talk to don't understand this.
When Should Wealthy Families Start Gifting to Reduce Their Estate Tax Exposure?
If your parents have expressed an interest in giving more, or if you are a parent and want to give your kid more money, want to give them more responsibility, maybe they're a young adult, you want to start them off with a trust to see how they do, you can do that. All of that is in your power and it basically boils down to two things.
Either one, your estate isn't going to be $30 million, so the amount you give away doesn't matter. Or two, your estate is going to be over $30 million, in which case you should absolutely be doing everything you can right now to get money out of it, and gifting is a huge piece of that.
How Can Future Inheritors Talk to Their Parents About Annual Gifting?
If you're a parent who's struggling to navigate this, or if you're a future inheritor who's struggling to navigate this with your parents right now, my goal is that you can just send them this episode, share a little bit of knowledge on annual giving. Because again, 99% of people don't understand this.
At the end of this episode, now you do. Feel free to shoot me an email with any questions, katherine@sunnybranchwealth.com.
You can find me on Instagram @sunnybranchwealth. And if you're not ready to chat in real time yet, you can catch me on next week's episode of Heir Necessities.
Let’s take the next step together
Understanding how to protect, invest, grow, and/or give away a multi-million dollar inheritance isn’t easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, reach out to Katherine Fox, CFP® and CAP®, financial planner for inheritors, to learn how Sunnybranch can help you evaluate your financial situation and build a plan for your financial future.
