How Smart Are You About the Annual and Lifetime Gift Tax Exclusions?

Some say it’s better to give than to receive. But if your clients are the ones doing the giving, they need to follow the rules to avoid some unpleasant tax consequences. All advisors face questions about these rules. Here is your chance to test yourself on your understanding of the constantly changing annual and lifetime gift tax exemptions, their current limits, interpretations and operations. Your clients are counting on you to get these details right. There are 15 questions. See if you can answer 10 or more correctly. 

Q. For 2020, the annual federal gift tax exclusion per individual is:

A. $5,550

B. $10,000

C. $14,000

D. $15,000

Ans: D ($15,000)

The annual federal gift tax exclusion allows individuals to give away up to $15,000 to other people without those gifts counting against the lifetime exemption.

Q. Under the latest rules, the annual gift tax exclusion is indexed for inflation.

A. True

B. False

Ans: A (True)

The exclusion is indexed for inflation. The exclusion can be adjusted by fixed increments of $1000.

Q. New exemption thresholds for the federal lifetime estate and gift tax exemption were established by the Tax Cuts and Jobs Act (TCJA). For 2020, the lifetime gift tax exclusion per individual is:

A. $5.6 million

B. $9.55 million

C. $11.58 million

D. $12.8 million

Ans: C ($11.58 million)

Starting in 2020, the lifetime gift tax exemption is $11.58 million. This means that clients can give up to $11.58 million in gifts over the course of their lifetime without ever having to pay gift tax on it. For married couple, both spouses get the $11.58 million exemption. This means that if the clients are married, they can give away a total of $23.16 million before paying the gift tax.

Q. Jack and Jill, a married couple, want to make a gift to their son, also married. What’s the maximum amount of annual exclusion gifts Jack and Jill can transfer in one year to their son’s family without using any lifetime transfer tax exemption?

A. $30,000

B. $45,000

C. $60,000

D. $75,000

Ans: C ($60,000)

Jack and Jill each can give $15,000 to their son and the son’s spouse without triggering any estate tax.

Q. Jack has an estate with a fair market value of $25 million when he dies. His wife Jill survives him and is his sole inheritor. How much of the estate is subject to federal estate taxes?

A. $0

B. $890,000

C. $2,013,000

D. $2,500,000

Ans: A ($0)

Under what is known as the unlimited marital deduction, the estate tax does not apply to assets that will be transferred to a surviving spouse. However, when the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate exceeds the exclusion limit.

Q. In general, gifts to trusts are eligible for the annual exclusion.

A. True

B. False

Ans: B (False) 

Gifts to trusts are not generally eligible for the annual exclusion. This reality complicates the wishes of clients who want to gift assets to their children in trust rather than outright.

Q. Jack makes a donation to a 529 plan. Can he do so without applying any of the lifetime gift tax exclusion?

A. Yes

B. No

Ans: A (Yes)

Clients can donate to 529 plans to further extend the power of annual exclusion gifts.

Q. The law allows taxpayers to “front-load” several years worth of donations to a 529 plan into a single year and use no transfer tax exemption. What’s the maximum number of years that can be front-loaded into a single years contribution in this manner?

A. Two

B. Three

C. Five

D. Seven

Ans: C (Five)

A donor may front-load five years worth of annual exclusion gifts into a single years contribution to a 529 plan account. Distributors from a 529 plan account may be made free of income tax as long as they are made for “qualified education expenses”

Q. Jill wants to contribute to her grandson’s 529 plan. Under current tax law allowing so-called “superfunding”, she could contribute up to ______, treating the entire amount as annual exclusion gifts for that year.

A. $15,000

B. $30,000

C. $75,000

D. $150,000

Ans: C ($75,000)

Jill could be up to $75,000 ($15,000 x 5) in one year to her grandson’s 529 plan for that year and the following four years without using any of her lifetime exemption. Jill’s spouse can do the same to jump-start a child’s or grandchild’s college savings account. This instance of the five-year gift tax averaging rule (“superfunding”) is described in section 529(c)(2)(B) of the IRS

Q. Which of the following types of gifts reduce the annual gift exclusion?

A. Tution

B. Medical expenses

C. Gifts to a spouse

D. Gifts to a political organization

E. None of these

Ans: E (None of these)

While any gift is generally a taxable gift, exceptions do exist. For example, the following gifts are not taxable: gifts that are less than the years annual exclusion, tuition, medical expenses, gifts to a spouse, gifts to a political organization.

Q. The Tax Cuts and Jobs Act (TCJA), which most recently established the current limits of the lifetime gift exclusion, was passed with a built-in sunset clause. In what year is the TCJA scheduled to expire?

A. 2024

B. 2025

C. 2029

D. 2030

Ans: B (2025)

The Tax Cuts and Jobs Act (TCJA) dramatically (but temporarily) increased the exemption level of the estate, gift and generation-skipping tax.

Q. The TCJA eliminated portability, a provision under which if the first spouse to die did not use up all of his or her exemption, the remaining amount was portable, meaning it could be used by the second spouse.

A. True

B. False

Ans: B (False) 

The TCJA retains portability of the estate tax exclusion. Under the portability provision, the executor of the estate of the first spouse to die can elect to have the “deceased spousal unused exclusion” (DSUE) transferred to the estate of the surviving spouse.

Q. Approximately how many federal estate tax returns does the IRS predict will be filed in 2020?

A. 1,900

B. 4,100

C. 80,500

D. 540,000

Ans: B (4,100)

Estate tax returns are estimated to be filed for people who die in 2020 – less than 0.1% of the 2.8 million people expected to die in that year.

Q. Of the estate tax returns the IRS expects to be filed in 2020, approximately how many returns does the IRS expect will actually incur tax liability?

A. 12

B. 800

C. 1,900

D. 4,500

Ans: C (1,900)

The IRS estimates only 1,900 estate tax returns in 2020 will incur a tax liability of $16 billion. As recently as 2001, the IRS recorded 109, 600 estate tax returns, 50,500 of which incurred tax liabilities totaling $23.7 billion.

Q. How many jurisdictions in the United States impose state estate taxes in addition to the estate taxes the federal government imposes?

A. 6

B. 13

C. 24

D. 34

Ans: B (13)

These are 13 jurisdictions (and the value of estates triggering liability) that also impose estate taxes. Connecticut ($3,600,000); District of Columbia ($5,600,000); Hawaii ($5,500,000); Illinois ($4,000,000); Maine ($5,600,000); Massachusetts ($1,000,000); Maryland ($5,000,000); New York ($5,000,000); Oregon ($1,000,000); Minnesota ($2,700,000); Rhode Island ($1,561,719); Vermont ($2,750,000); Washington ($2,193,00)

Source: https://www.wealthmanagement.com/estate-planning/how-smart-are-you-about-annual-and-lifetime-gift-tax-exclusions