The Internal Revenue Service announced in late October that the annual gift tax exclusion for 2010 will be $13,000, the same as in 2009. The annual exclusion allows every individual to give $13,000 to each family member or other beneficiary without any transfer tax implications. If only one spouse makes a gift to an individual, the donor and his or her spouse can elect to treat a gift to an individual as though each spouse made one-half of the gift to the individual, effectively allowing a married individual to double the benefit of the annual exclusion to $26,000 if the non-donor spouse makes no annual exclusion gifts to the done in the same calendar year.
Given the above, the potential estate tax savings offered by the annual gift tax exclusion can be substantial. For example, suppose a mother and father with a large estate have two married children and four grandchildren. Mother and father could transfer $26,000 to each child and grandchild ($156,000 annually) without gift taxes. After five years, the gifting will have reduced mother and father’s combined estate by $780,000.