One very important aspect of estate planning is determining how to eliminate taxes as much as possible. Such taxes include estate and gift taxes. When you die, your estate may be required to pay estate taxes depending on the total value of your assets. You may also be required to pay gift taxes whenever you transfer ownership of property to someone else. The good news is that there are exemptions to these taxes that can be a great benefit. This article will explain what you need to know about the Kentucky gift tax.
Understanding what constitutes a gift
According to federal law, a gift refers to “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” There are few exceptions that may apply, however, when it comes to gift taxes. For example, if you pay tuition or medical expenses for someone, those particular gifts are not taxable. Any gifts you make to your spouse, or to political organizations and qualified charities can be deducted from your personal income tax.
Is there a Kentucky gift tax imposed?
Over the last ten years or so, most of the states that still imposed gift taxes have been eliminating them systematically. There is no Kentucky annual gift tax. However, Kentucky remains one a few states that impose taxes on so-called “deathbed” taxes. “Deathbed” gifts are those made in expectation of impending death and made within a short period of time before the donor dies. Deathbed taxes are imposed in order to prevent these types of gifts which effectively allow people to bypass estate or inheritance taxes. In some states, including Kentucky, if you make a transfer of a substantial part of your estate within three years of your death, that gift could be construed as a deathbed gift and could incur a tax.
How the annual gift exclusion works
The most important exclusion that can be used to avoid gift taxes, as well as estate taxes, is the annual gift exclusion. This exclusion considers gifts that do not exceed the annual exclusion amount for that calendar year as exempt from taxes. The annual gift tax exclusion amount for 2016 is $14,000 per recipient. This basically means that you can give away as much as $14,000 during the calendar year to each recipient you choose without any tax consequences. It also means that you can give as many of these $14,000 gifts as you choose to different people, including family, friends or even strangers.
So essentially there is no limit on how much you can give away, as long as you do so in increments of $14,000 or less to each person each year. There is an added benefit for married couples. Spouses are allowed to combine their gift tax exclusions so that their joint gifts can be as much as $28,000 for each recipient each year.
Restrictions that may apply to the annual gift tax exclusion
There is one important requirement that must be met for the annual gift exclusion to apply. The gifts being made must be one of “present interest,” which means the person must receive an unrestricted right to immediate possession, use and enjoyment of the gift. Otherwise, the exclusion will not apply. For example, an irrevocable trust that does not allow the recipient to have access to the money until they reach a certain age is considered a gift of a future interest.
What is the unified credit?
In addition to the gift tax exclusion, there is also a Federal estate tax exclusion that makes a certain portion of your estate exempt from Federal taxes. These two exclusions together are often referred to as the unified credit. Combined they provide a lifetime exclusion of $5.45 million as of 2016. As of 2017 it has increased to $5,49 million.
Maximizing your benefits from the annual gift tax exclusion
If you are looking to make the most of your annual gift exclusion, first recognize that the exclusion is based on the calendar year – January through December. Although you may not go back and claim a year you missed, you can spread a large gift over two or more years and still avoid gift tax consequences. For example, if you want to give a $20,000 gift to your child, write one check for $10,000 in December 2016 and another check for $10,000 in January 2017. Both gifts will remain tax free.
Attend a FREE seminar! If you have questions regarding a Kentucky gift tax, or any other estate planning matters, contact Gersh Law Offices, P.S.C. for a complementary consultation either online or by calling us at (502) 423-7023.