There is a unified tax exclusion in California that separates those who must pay transfer taxes from those who are exempt. The lifetime unified exclusion at the present time is $5.34 million in 2014.
There is a gift tax and an estate tax. The two taxes are unified. As a result of this unification, the exclusion applies to gifts that you give while you are living, coupled with the value of your estate as it is being transferred to your heirs after your passing.
It should be noted that there is also a generation skipping transfer tax that can be part of the equation. It is potentially levied on transfers of assets to family members who are more than one generation younger than you. It can also be applicable on transfers to individuals who are at least 37.5 years younger than you who are not family members.
The maximum rate of the estate tax, the gift tax, and the generation-skipping transfer tax is 40 percent.
Giving Gifts While You Are Living
Is there a benefit to giving gifts using the unified exclusion while you are still alive? In a general sense the answer would be no.
Consider this hypothetical scenario. You have assets valued at $10.34 million. You use the unified exclusion to give tax-free gifts valued at $5.34 million throughout your life. The remaining $5 million will be taxable after you die, because you have utilized all of your unified exclusion.
If you don’t give any gifts throughout your life using your exclusion, the same scenario will exist after you pass away. The first $5.34 million will pass tax-free, and the $5 million remainder will be taxable.
Annual Per Person Exclusion
When you are evaluating your ability to give gifts while you are alive in a tax-free manner, you should understand the fact that there is an annual per person gift tax exclusion. This exclusion sits apart from the unified exclusion.
Every year you can give a certain amount to any number of gift recipients before the gift tax would be applicable. This amount is subject to change to account for inflation, but it is currently $14,000.
You can give as much as $14,000 to an unlimited number of individuals within a given calendar year free of gift tax exposure.
Remember, this is a per person exclusion. So, if you are married, you and your spouse could combine your respective exclusions. This would enable you to give as much as $28,000 to any number of gift recipients tax-free in a given year.
In addition, you don’t have to give direct gifts to use this exclusion. Many individuals will utilize the exclusion to fund trusts on an incremental basis. It is also possible to use this exclusion to distribute shares in a family limited partnership without incurring any gift tax responsibility.