When it comes to special needs planning, the federal gift tax system is a very misunderstood beast. The main reason for this is that it’s incredibly complicated, and so people end up thinking it works one way when it really doesn’t!
Because it’s so hard to understand, a common misconception is that you can only give away $14,000 to a person within a single calendar year without being taxed. Fortunately, this isn’t true — which means you can donate much more than that amount to a special needs trust in order to take care of the disabled beneficiary. Keep reading to learn more!
What Is the Gift Tax?
The federal gift tax is a tax that is imposed by the government on the giver of a gift. It is not a tax imposed on the recipient of the gift.
Also, the gift tax only applies in the event that the donor has given taxable gifts of more than $5.45 million in his or her lifetime (as of 2016). That means that if you, as the donor, do not have a taxable estate worth more than $5.45 million, and if you do not plan to give away gifts that approach that amount during the course of your lifetime, then the federal gift tax probably won’t ever apply to you.
So as long as you don’t hit the $5.45 million mark when it comes to donations made to a special needs trust, you can give away as much as you like to the trust’s beneficiary and never have to worry about gift tax once you file your tax return.
So Where Does the $14,000 Number Come From?
This number is known as the “annual exclusion.” It’s the amount that a donor can give to a person within a calendar year without having to file a gift tax return declaring the gift.
And since you don’t even have to file a gift tax return for “small gifts” less than $14,000, they don’t count toward your $5.45 million lifetime gift total, either.
If you are very wealthy and you’re trying not to use up your $5.45 million lifetime gift exemption, staying below the annual exclusion might be a good idea. But for the majority of people who don’t have to worry about the lifetime limit before the gift tax kicks in, the annual exclusion amount is irrelevant.
Questions about Donations to Special Needs Trusts? Contact Alabama Family Trust!
Alabama Family Trust is the expert when it comes to special needs trusts. We can answer your questions about everything from establishing a trust to making donations, and we’ll treat you like family during the entire process.
Don’t hesitate to plan for your disabled or elderly loved one’s financial future. Make sure they are well cared for when they need it most. Contact us today!