There is a ritual that often occurs in high net worth households in the final weeks of the year. It can be a check in the mail or tucked inside a Christmas present. At other times, it may be a deposit into a 529 plan or a trust without the beneficiary knowing. Regardless, we are at the time of year when the older generations in wealthy families make the annual gift exclusion to the younger generations. The amount they typically gift them: $15,000 per person.
While this ritual is typical for those with means, it’s all part of a bigger strategy. For people able to make the annual gift, it’s about moving assets out of their estate. The annual gift exclusion is a simple and easy way to do it, because the IRS allows a taxpayer to gift a designated annual amount to anyone without incurring any gift tax. For 2019 and 2020, the maximum gift amount is $15,000 per donee. This means a married couple could gift to each of their family members $30,000 annually.
For the majority of Americans, the annual gift is irrelevant as they don’t have taxable estates and don’t make gifts of this magnitude. But for the high net worth, it can be a very powerful tool.