It’s that time when the IRS announces what you can pass on to others next year without paying federal gift or estate tax.  Revenue Procedure 2015-53 contains 27 pages of inflation-adjusted items for 2016.  Wedged between the inflation adjustments for the foreign earned income exclusion and the “tax on arrow shafts,” are the 2016 numbers for the unified credit against estate tax and the annual exclusion for gifts.

  • The estate tax exclusion gets a $20,000 inflation bump from $5.43 million per individual to $5.45 million
  • The gift tax annual exclusion stays at $14,000 for 2016

Gift tax annual exclusion:  The gift tax annual exclusion excludes the first $14,000 of a gift from tax.   In other words, you can give away $14,000 to as many friends and family members as you’d like without worrying about gift tax.  But the gift tax annual exclusion applies only to gifts of present interests.  If someone wants to make annual exclusion gifts to trusts, it is essential to draft the trusts carefully to qualify for the annual exclusion.  (More about these “Crummey” trusts in future posts.)  As can be expected, things get even more complicated if a grandparent wants to make a $14,000 gift to a trust for a grandchild and have the gift qualify for both the gift tax annual exclusion and the generation skipping transfer tax annual exclusion.  (More in future posts on the GST tax as well.)

Unified gift and estate tax exclusion:  The federal estate and gift taxes are unified, which means that the $20,000 inflation bump applies to lifetime gifts and on-death transfers.  Individuals who “maxed out” their $5,000,000 unified gift/estate tax exclusions in 2012 have the ability to make some more lifetime gifts — $450,000 more as of 2016 — thanks to annual inflation adjustments.