I think the gift and estate tax is one of the most commonly misunderstood taxes. In short, it only impacts super rich people.‎
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Here’s how it works. Every person has a “lifetime amount” which they can gift or leave as part of their estate under which NO gift/estate tax is owed. Back in 2005 that number was “only” $1.5 million, but it has been increasing ever since, now topping $11 million.‎
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The total amount you gift or leave is basically tracked as part of your taxes. For example, if you gave $1M/year away for the next 12 years you would owe ZERO gift tax for the first 11 years, then in the 12th year (when you exceed the $11.7M) you would owe gift tax on the last $300,000 (assuming the gift tax exclusion amount stays constant until then, which it probably won’t).‎
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You may be thinking “Ok, but I gave my kids $100 and I didn’t log that with the government”. Well, have fun in prison you filthy criminal. Just kidding. You’re in luck. There’s actually an “annual federal gift tax exclusion” of $15,000. That means under that amount, you don’t have to pay tax on it PLUS it doesn’t even count toward that $11.7M running total. So if you gave away $15,000/year for 10 years, your progress towards the $11.7M would still be at zero.‎
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Many people think that over $15,000 you owe the gift tax, but that’s not true. Gifts over $15,000 in a year simply need to be counted toward the $11.7M but won’t actually incur the gift tax until your lifetime giving is over that larger lifetime exclusion.‎
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Note that this number is could be changed in the future. It could go lower (or higher) based on which way the political winds are blowing.‎
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I’ve heard some insurance salesmen pitch whole life insurance as a way to get around the gift tax (as the life insurance payout isn’t taxable). But of course they fail to mention the massive exclusion amount. So fear of that tax is not a reason to get involved with an underperforming insurance product for the next many decades of your life.‎
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As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.‎
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-Jeremy‎
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