Lifetime Gift Tax Exclusion Letter Template

Understanding the Lifetime Gift Tax Exclusion

The lifetime gift tax exclusion allows you to give away a certain amount of your assets tax-free during your lifetime. This exclusion amount is set by the IRS and periodically adjusted for inflation.

For 2023, the lifetime gift tax exclusion is $12.92 million per individual. This means you can gift up to $12.92 million over the course of your life without paying federal gift taxes on those transfers.

It's important to utilize this exclusion strategically as part of your overall estate and tax planning. Gifting assets can reduce the size of your eventual taxable estate and minimize potential estate taxes for your heirs.

When to Use a Gift Tax Exclusion Letter

You'll want to document gifts that you make which utilize a portion of your lifetime exclusion. This helps keep accurate records and proves the gifts were made while staying under the annual and lifetime limits.

Some common situations where a gift tax exclusion letter is helpful include:

• Making large monetary gifts to children or grandchildren (e.g. for education, down payment on a home, etc.)
• Transferring ownership interests in a family business or investment properties
• Giving valuable personal assets like jewelry, art, vehicles, etc.

Even if the gift amount falls under the annual exclusion for that year, it's still wise to properly document it, especially for larger gifts. The annual exclusion amount is currently $17,000 per recipient for 2023.

Key Components of the Letter Template

To properly document use of your lifetime gift tax exclusion, the letter should contain the following key details:

• Date the gift was given
• Full legal names and addresses of the donor (you) and recipient
• Detailed description of the gift (cash amount, property address, asset details, etc.)
• The value of the gift on the date it was given
• Statement that the gift is a non-taxable transfer under the lifetime gift tax exclusion
• Signatures of both the donor and recipient

While not legally required, having the letter notarized can also add credibility if questions arise in the future regarding the gift date or details.

Sample Gift Tax Exclusion Letter Template

[YOUR NAME] [YOUR ADDRESS]

[DATE]

Dear [RECIPIENT NAME],

I am writing to formally document my gift to you, which is a non-taxable transfer under the federal lifetime gift tax exclusion.

On [DATE], I gifted to you [DESCRIPTION OF GIFT - amount of cash, property address, asset details]. The fair market value of this gift on the date transferred was $[AMOUNT].

This gift represents part of my $12.92 million lifetime gift tax exemption for the 2023 tax year. I have filed no federal gift tax returns prior to this transfer.

Please sign below to acknowledge receipt of this gift. I would also like a copy of this letter returned to me for my records.

Thank you, [YOUR SIGNATURE]

Recipient's Acknowledgment:

I, [RECIPIENT NAME], acknowledge receipt of the gift described above with a fair market value of $[AMOUNT] on [DATE].

[RECIPIENT SIGNATURE] [DATE]

Calculating the Remaining Lifetime Exclusion

After making a taxable gift, it's important to keep track of how much of your lifetime exclusion remains. The IRS allows you to gift up to the annual exclusion amount ($17,000 for 2023) per recipient each year without it counting against your lifetime limit.

Any gifts over that annual amount, however, do count against your $12.92 million lifetime exclusion for 2023. You'll need to report these on IRS Form 709 for the tax year they occurred.

Let's say you gifted $100,000 to your child in 2023. The first $17,000 would fall under the annual exclusion. But the remaining $83,000 would count against your lifetime exclusion, leaving you with $12,837,000 remaining ($12.92 million - $83,000).

Be sure to keep detailed records tracking your gifts each year and their values. This running total is crucial for understanding how much of your exclusion is still available for future gifts.

Gift Tax Filing Requirements

While you don't actually have to pay gift taxes on gifts under the lifetime exclusion limit, you are still required to file IRS Form 709 (the federal gift tax return) in any year you make taxable gifts over the annual exclusion amount.

For example, say in 2023 you gave your child $25,000. Since the annual exclusion is $17,000, you would need to report the excess $8,000 by filing Form 709. This allows the IRS to properly track your use of the lifetime exemption.

Form 709 is due by the tax filing deadline for that year, typically April 15th. Even if you don't owe any gift taxes, accurately filing this form is a legal requirement for taxable gifts over the annual exclusion.

Failing to file Form 709 can lead to potential penalties down the road, so be sure to keep up with this filing requirement if you're actively making larger gifts that leverage the lifetime exemption.

Tips for Documenting Gifts Under the Exclusion

Beyond the formal gift letter, here are some additional tips to thoroughly document gifts utilizing the lifetime exclusion:

• Keep copies of any appraisals or valuations used to determine the gift amount
• Save records like bank statements, property titles/deeds, stock certificates, etc. showing the asset transfer
• Note the purpose of each gift in your records (ex. educational, down payment, business transfer, etc.)
• Photograph items like cars, jewelry, art, etc. given as non-cash gifts for your files
• Maintain a detailed spreadsheet tracking all gifts, dates, recipients, values, and remaining exclusion
• Store all documentation securely but make sure executors know where to access it

Meticulous record keeping now can prevent headaches and minimize potential gift/estate tax issues later on.

Wrapping Up - Next Steps and Resources

Utilizing the lifetime gift tax exclusion is a valuable estate planning strategy. But properly documenting your gifts and tracking your exemption use is crucial.

The formal gift letter template provided can help keep your records clear. But it's also wise to consult a qualified tax advisor or estate attorney regarding your specific situation.

They can review your gifting plans in light of current tax laws, ensure you comply with all IRS regulations, and maximize the benefits of your lifetime exemption amount.

You can find more information and the latest annual exclusion amounts on the IRS website:

• Frequently Asked Questions on Gift Taxes
• About Publication 559, Survivors, Executors and Administrators

With careful planning and the right documentation, the lifetime gift tax exclusion can be a powerful tool to transfer your wealth in a tax-efficient manner.