President Obama’s Estate Plan Reminds Us of the Power of the Annual Exclusion

 by David Kovsky

On April 13, 2012, The Washington Free Beacon ran an article deriding President Obama’s reliance Section 2503(b) of the Internal Revenue Code to transfer $48,000 to his daughters, free of any federal wealth transfer taxes.  Under that section of the Code, each taxpayer may transfer $10,000 to any number of individuals on an annual basis, free of the federal gift tax.  This is the so-called “annual exclusion.”  Section 2503(b) further provides that the annual exclusion will be indexed for inflation.  As such, the amount that may be transferred to each donee in 2012, free of the federal gift tax, is $13,000.”

The rationale behind the annual exclusion is to not mire the taxpayer or the IRS in tracking the aggregate of annual birthday presents, holiday gifts or dinners on “mom and dad.”  Only when the amount rises to the level of what is deemed wealth transfer, will the gift tax be triggered.

Although the article run by The Washington Free Beacon had a political slant, it is also a great reminder of how useful the annual exclusion can be from an estate planning perspective.  Take, for example, the following hypothetical:  Grandmom and Grandpop have three married children and six grandchildren.  By utilizing the annual exclusion, Grandmom and Grandpop can transfer an aggregate of $312,000 of wealth to Generation 2 and Generation 3, without incurring a gift tax or a generation-skipping transfer tax (another federal wealth transfer tax with its own set of annual exclusion rules), every single year.  If these gifts are made in December of year 1 and January of year 2, our hypothetical Grandmom and Grandpop can transfer over $600,000 during a several week period, free of any federal wealth transfer taxes.  Here is breakdown of the transfers in year 1 (which may be replicated in year 2):

Donee:	Grandmom	Grandpop:
Child 1	$13,000	$13,000
Spouse 1	$13,000	$13,000
Child 2	$13,000	$13,000
Spouse 1	$13,000	$13,000
Child 3	$13,000	$13,000
Spouse 3	$13,000	$13,000
Grandchild 1	$13,000	$13,000
Grandchild 2	$13,000	$13,000
Grandchild 3	$13,000	$13,000
Grandchild 4	$13,000	$13,000
Grandchild 5	$13,000	$13,000
Grandchild 6	$13,000	$13,000
TOTAL:	$156,000	$156,000

This type of estate planning could be as simple as writing checks to all of your immediate family.  However, for many clients, these transfers should be made in conjunction with the establishment of a specially designed trust that qualifies for the annual exclusion and assists clients in meeting their goals of providing the children (and grandchildren) with a measure of asset management assistance, creditor protection and future transfer tax savings.

In whatever form it takes, outright transfers or in trust, fully utilizing the annual exclusion is a powerful estate planning tool that is often overlooked.

Explore posts in the same categories: Annual Exclusion, Estate Planning, Gift Taxes, Trusts, Wealth Planning

Tags: Annual Exclusion, Estate Plan, President Obama, The Washington Free Beacon

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