Here's an excerpt from a follow-up email that I sent to an attendee of a recent Workshop that I hosted. I'm sharing it because it contains a couple of common misconceptions about the Federal Gift Tax and maximum annual gift tax rule.
"Mr. Smith, I wanted to follow-up with you regarding your question about the “Nelda” story from my Workshop talk today.
If you recall, we talked about Nelda would be permitted to make a distribution from her Trust to her daughter and her daughter could give it back to her without tax consequences. The story is intended to show the freedom that Nelda would have within her Trust. One of your questions, though, was more along the lines of gift tax…..I think you asked why wouldn’t Nelda’s daughter be taxed on the distribution from Nelda?
From the way you asked your question, I believe you are under the impression that gifts to a person in excess of $14,000 per year are taxable to the recipient. But, that’s not the case. Gifts that are truly gifts are not taxable to the recipient regardless of the amount (here’s a link to an IRS tax tip https://www.irs.gov/uac/eight-tips-to-determine-if-your-gift-is-taxable). The issue with gifts exceeding $14,000 to one person in a year is that the lifetime exemption of the “giver” is reduced by the amount that the gift exceeds $14,000. At present, the lifetime exemption for federal estate taxes is $5,490,000 for single filers and $10,980,000 for a married couple. So, if a person were to give $15,000 to one person in a year, the “giver” would have her lifetime exemption reduced by $1000 to $5,489,000 ($15,000-$14,000 = $1000. $5,490,000 - $1000 = $5,489,000). So, after the reduction of the lifetime exemption, the “giver” would owe 40% tax on their estate to the extent that it exceeds $5,489,000 rather than $5,490,000. But, there would be no tax consequences to the giver for the year of the gift and there would be no tax consequences to the recipient at any point.
I just wanted to clarify that for you. Let me know if you have any questions."