Imposition of Federal Gift Tax

Gifts totaling more than the annual exemption amount ($15,000 in 2018 and 2019, $14,000 in 2017) to one person in one year are referred to as taxable gifts and generate a potential Gift Tax. It does not matter if you give one $15,000 gift or 15 gifts of $1,000 each, or one gift of $13,000 and a “birthday gift” of $2,000. Gifts of a “future interest”, no matter what their value, also are considered a taxable gift. Unlimited gifts can be made to a spouse who is a US citizen.

If you go over the $15,000 per person per year amount, you have to file IRS Form 709, to report the gifts.

Taxable gifts generate a Gift Tax. But Gift Tax is not due until you give away over $11.4 million (the amount is indexed for inflation) in your lifetime (the lifetime federal exemption amount was doubled by the 2017 Tax Cuts and Jobs Act but starting 2026, the exclusion amount reverts to the 2017 exclusion level).

Case Studies: Utilizing Insurance in Managing Federal Gift Tax

Case Study 1: Irrevocable Life Insurance Trust (ILIT)

In this case, an individual has a significant estate and wants to minimize their potential Gift Tax liability. They establish an Irrevocable Life Insurance Trust (ILIT) and transfer a substantial amount of assets into the trust. The individual then purchases a life insurance policy with the ILIT as the owner and beneficiary.

The premium payments for the policy are made by the trust using the annual gift tax exemption. Upon the individual’s death, the insurance proceeds are paid out to the ILIT, which can be used to cover the Gift Tax liability on the assets transferred into the trust.

This strategy helps protect the individual’s estate from excessive taxation and provides liquidity to cover the tax obligations.

Case Study 2: Charitable Remainder Trust (CRT)

In this scenario, a wealthy individual wishes to make substantial gifts to a charitable organization while also reducing their potential Gift Tax liability. They establish a Charitable Remainder Trust (CRT) and fund it with assets, such as real estate or appreciated securities.

The CRT provides the individual with an income stream for a specified period, after which the remaining assets in the trust are transferred to the charitable organization.

To ensure the individual’s ability to make the gift, they purchase a life insurance policy and name the charitable organization as the beneficiary. If the individual passes away before the trust term ends, the insurance proceeds can be used to fulfill the charitable gift, ensuring the organization receives the intended donation.

Case Study 3: Qualified Personal Residence Trust (QPRT)

In this case, an individual owns a valuable primary residence and wants to transfer ownership to their children while minimizing their potential Gift Tax liability. They establish a Qualified Personal Residence Trust (QPRT) and transfer the ownership of the residence into the trust. The individual retains the right to live in the residence for a specified term, after which ownership passes to the children.

To offset the potential Gift Tax liability associated with the transfer, the individual purchases a life insurance policy and names the children as beneficiaries.

If the individual passes away before the end of the trust term, the insurance proceeds can be used to equalize the inheritance among the children and cover any outstanding tax obligations.