One of the major driving factors that drove me to save and invest was trying to make life easier for my heirs than it was for me. I worked a night job as early as high school, worked my way through college, and scrimped, saved, and denied myself many of the basic pleasures of life early in my career.

I never wanted that for my kids. Some people have told me “Those experiences made you who you are”, but the flip side of that is that this is extremely hard to do, and certainly would prevent many people from finishing college. So, I didn’t want to take that risk. I think most parents look to give their kids a better life than they themselves had.

Here’s the thing, though. I hope to live another 30 years. My college-age son is 20. I am sure he could use money from me well before he turns 50. So, I began to investigate ways to transfer money to him over time.

One of the first obstacles I encountered was the gift tax. The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift.

The gift tax applies to the transfer by gift of any type of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

Gift Tax Rules and Exceptions

The Internal Revenue Service (IRS) sets the exceptions and annual limits on how much you can give before taxes are applicable on the gift. From the IRS:

“The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

1. Gifts that are not more than the annual exclusion for the calendar year.
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.”

Annual Exclusions

If you have a substantial estate and you are trying to transfer it to your heirs over time, be aware of the annual gift tax limits:

Year of Gift	Annual Exclusion per Donee
2011 through 2012	$13,000
2013 through 2017	$14,000
2018 through 2021	$15,000
2022	$16,000
2023	$17,000

For a while, I thought that was the end of the story. This year I could transfer $16,000 to my son, and anything beyond that would be taxable. In fact, in the above-referenced page from the IRS, they don’t indicate any other exceptions to this rule. But there is a big one.

The Big Exclusion

Although I had read several IRS publications on the annual gift tax limit, it was only last week that I learned about the lifetime gift tax exclusion. This is the amount you are allowed to give away tax free over your lifetime above the annual gift tax exclusion limit. It turns out that’s a big number — $12.92 million in 2023, or $24.12 million for married couples.

This lifetime exclusion is shared with the estate tax, so it reduces the amount you can leave to your heirs tax-free when you die. For most of us, that won’t be a problem due to the very high limit.

However, if you do go above the annual gift tax exclusion limit, you have to file this with the IRS so they can keep track of the exclusion versus the lifetime limit. The IRS calls this a “unified credit.”

One final thing to note, which once again applies to very few of us. The current limit was put in place with the passage of the Tax Cuts and Jobs Act (TCJA). It only applies to tax years up to 2025, at which point it will revert back to a lifetime limit of $5.49 million.

Congress may take action to extend the limit, but at least for now, if you have an estate larger than this and want to get it into the hands of your heirs, you may want to make plans to do that before 2025.

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