User Question: Understanding the Estate Tax and...

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This fantastic question about the estate tax came from Richie Phillips, one of our forum users. 


 From Richie Phillips

If an individual gives multiple gifts of less than the exclusion amount over their lifetime, do each of these gifts still count toward the aggregate exclusion amount for estate tax?

For example, an individual taxpayer gives gifts to 1,000 people of $15,000 each. This is an aggregate total of $15,000,000. Since each gift was below the annual exclusion amount, does it matter that the aggregate total is above the $11.7 Million aggregate exclusion amount? Or will the taxpayer owe estate taxes on $3.3Million, the amount over the Estate exclusion limit? Hope this question makes sense.

Trying to wrap head around this. Thanks in advance.


From Christy Pinheiro 

Hi Richie, I understand what you are asking.

That $15,000 annual gift is not reportable, and does not count against the aggregate "lifetime" limit. We are talking about the ESTATE and GIFT tax, (not the income tax, now). The ESTATE tax is a tax on the transfer of property.

Congress basically does not want wealthy people to gift huge assets at the very end of their lives in order to distribute the majority of their estate to their family and friends and escape the estate tax. Whether you think this is right or wrong, it's just the way it is, and many wealthy people actually do NOT do any estate planning until it is too late, or they are in hospice, or whatever. In that case, it does make it much more difficult for the truly wealthy to avoid the estate tax and distribute assets to their loved ones. 

Now, if you happen to die and do not have assets even close to that $15 million limit, then none of this really matters.

But let's say I own valuable real estate, plus I have a lot of money and investments and also a valuable company and now my estate is worth more than $15,000,000. I want to make sure I distribute as much as I can to my family, tax-free to them, and non-reportable, so it does not count against my estate tax exclusion. 

I can give up to $15,000, in cash, every year, to any human I want, family or friends, and that never has to be reported anywhere. It is also not taxable to the recipient. So, let's say I want to transfer as much as I can to my brother, and by extension, my nieces and nephews, tax-free, and I do NOT want it to count against my lifetime exclusion. That's where estate tax planning comes in. 

My brother is married and has three kids. Okay, so I can give my brother and his family $75,000 in 2022 and nothing has to be reported anywhere ($15,000 X 5 people [my brother, his wife, and his three kids) all by giving them each separate checks, because they are all individual humans. Now, I am also married, so I could (potentially) ask my husband to write separate checks out of our joint account totaling $75,000 (once again, $15,000 each) and that, also would not be reported anywhere.

That means, that if my husband and I both write separate checks, we could potentially gift my brother's family $150,000 EVERY SINGLE YEAR, tax-free, and nonreportable, and that would not count against my gift/estate lifetime limit ($15,000 annual gift limit x 5 family members x 2 [me and the hubby]). 

Because each person is allowed to gift another person $15,000, every single year, and that is completely legal and does not have to be reported as a reportable gift. I can also increase this amount by offering to pay for my nephew's and niece's college education or any medical expenses, and as long as I make those payments directly to the college or the medical institution, that doesn't have to be reported, either. 

And yes, as you mentioned in your own example, if I wanted to gift 1,000 total strangers $15,000 each in 2022, that would be completely legal, not taxable to the donee, and not reportable by me (the donor). 

Realistically, though, wealthy people do not want to give 1,000 gifts to total strangers. What they want to do (and what most of us want to do, too) is to gift as many assets as possible to our children, or other very close relatives, like our parents or siblings.

This can easily be done, if it is done yearly, carefully, and consistently, (as I mentioned in the example above, with my brother), then wealth transfers can be made, but it has to be done with care, and annually. Not all at once when you get some terrible diagnosis, which unfortunately is how we see so many people who are just upper middle class get hit with the estate tax. Maybe they own valuable farmland, or even something as innocuous as 2 houses in the Bay Area, or Silicon Valley! And now their estate is over the limit.

This type of tax planning is so important to do BEFORE it is too late. But I digress. I hope this helps your understanding of a very, very complicated topic. 

~Christy Pinheiro, EA ABA

You can learn more about the estate tax, gift tax, and income tax by joining PassKey Online, and participating in our forums!

posted Jul 31, 6:03 pm (65 days ago)