Is there anything more confusing than the tax code? There’s plenty of contradictory advice out there, especially when it comes to the gift tax. An article from Special Needs Answers highlights the confusion around the $14,000 annual exclusion amount and its impact on special needs trust planning.
Many of us know that $14,000 is a magic number for the gift tax, but there are certain caveats and misunderstandings that often surround the number. Many people looking to provide for a special needs beneficiary with a special needs trust believe they’ll only be able to put in $14,000 a year without incurring a gift tax. However, that’s not the case.
Let’s take a step back and look at some gift tax basics. Firstly, the gift tax applies to the gift-giver, not the recipient. However, the gift-giver only incurs the tax once their lifetime exemption of $5.49 million is used up (for 2017). That means any individual can gift up to $5.49 million over his or her lifetime without paying federal gift taxes.
So why is everyone so obsessed with that $14,000? It’s the “annual exclusion amount,” or the amount any individual can give to another individual without being required to file a gift tax return. The added bonus of these smaller gifts is that because there’s no need to file a return, they won’t count against the lifetime exemption of $5.49 million. Especially for those looking to gift the full $5.49 million or more, these small $14,000 gifts can be a good way to provide for a child, give to charity or make any such gift without using up the lifetime exemption.
How does this apply to special needs trusts? Firstly, if drafted correctly, most gifts to irrevocable special needs trusts won’t ever qualify for the annual exclusion. While there are always exceptions, in most cases, the $14,000 limit won’t apply to gifts to a special needs trust. This changes if the trust is revocable or if the donor is also the trustmaker, but most loved ones looking to contribute to a special needs trust won’t need to worry.
Because the tax code is complex and so are the rules around special needs trusts and government benefits, it’s always best to work with an experienced estate planning attorney. For more information on special needs trusts, explore our website and contact us to schedule your consultation today!
Reference: Special Needs Answers (December 2015) “Gifts to a Special Needs Trust Can Be Larger Than You May Think”