Annual Exclusion Amount Increases

The annual exclusion amount will increase, effective for gifts made on or after January 1, 2009, from $12,000 to $13,000 per donee.  In 2009, donors may give $13,000 to any other individual without incurring federal gift tax, and to any close relative without incurring any Tennessee gift tax.  For gifts made before January 1, 2009, the limit is $12,000 per donee.  Beginning in 2009, married donors may give up to $26,000 per donee (previously $24,000) without incurring gift tax, even if only one spouse makes the gift, so long as the both spouses agree to split the gift for federal and Tennessee gift tax purposes.  Amounts paid directly to health care providers and educational institutions for tuition for the benefit of any donee continue to be exempt from federal and Tennessee gift tax.

Creating and implementing an annual gifting program, either through outright gifts or gifts in trust to children, is a relatively simple way for individuals or married couples with taxable estates to transfer assets to their children without paying gift tax on the transfer and to remove those assets (and their potential appreciation in value) from their estates for federal estate tax and Tennessee inheritance tax purposes.  Gifts are often made to one or more trusts for the benefit of the donors’ children.  The use of a trust is often appropriate if the children are not of an age where they are financially responsible.  Either spouse could be the trustee of such trust, which would permit the trustee spouse to retain control over the investment of the assets.  A properly drafted trust will permit a married couple to give up to $26,000 per child to the trust annually.  Gifts to an irrevocable trust for children will be protected from creditors of the children, including divorced spouses.

An example of the estate tax savings that can be achieved through the implementation of an annual gifting program follows.  A married couple age 60 with $5,000,000 of net assets today will be worth approximately $19,384,422 in 20 years (assuming 7% annual growth and income).  The estate tax (based on the 2009 rates and exemption) due on the death of the surviving spouse in 20 years will be approximately $6,500,000.  By gifting $100,000 per year, or 2% of the growth and income from $5,000,000, this married couple will have net assets valued at $13,266,488 in 20 years.  The federal estate and Tennessee inheritance tax (based on the 2009 rates and exemption) due on the death of the surviving spouse in 20 years will be approximately $3,500,000.  Consequently, by implementing an annual gifting program, this couple has saved their children approximately $3,000,000 in estate and inheritance tax, without paying any gift tax on the annual gifts.  If this married couple were to contribute to the trust an asset with a discounted value, like a family limited partnership interest, the estate and inheritance tax savings would be even more pronounced.