The Gift Tax Myth: How to Navigate Around It

Now, if my estate is less than $5.33mm, this would not be a problem at all, because my heirs would have no estate tax anyhow. However, if my estate is more than $5.33mm, than my heirs would have to pay estate taxes on anything inherited above $5.33mm. In other words, the lifetime exclusion bucket is used for both gift and estate tax purposes. So every time I use it to not pay gift taxes, I’m also reducing my estate tax exclusion… that’s how and why the gift tax and the estate tax are related to one another.

Many people aren’t aware of the fact that, in most situations, there really is no gift tax. Here’s why…

$14,000 Annual Exclusion

The federal government gives each of us an allowance to gift anybody $14,000 per year without incurring any gift tax. This $14,000/year replenishes every year, and it’s $14,000 per person. So, theoretically, I could gift every person that I know $14,000 today, and then another $14,000 next year and the year after, and there would be NO gift tax.

$5,430,000 Lifetime Exclusion

What most people don’t realize, is that there’s a second allowance of $5.43mm! In other words, let’s say that I want to give you $114,000. That’s $100,000 more than what I can give you out of my $14,000 annual bucket. That’s not a problem at all, because I also have the $5,430,000 bucket. The $5.43mm bucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate tax exclusion by that amount.

So in our example, if I gift you $114,000, I would take $14,000 out of my annual bucket and $100,000 out of my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOT replenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only” $5.33mm instead of $5.43mm.

About Rate Lock Extensions?

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Here's the scoop: mortgage rates are determined by mortgage bond prices.

Mortgage bonds trade in what's known as a "To Be Announced" (TBA) market.  When you commit to a rate lock, the lender is agreeing to deliver your mortgage to the bond investor within 30 days, 45 days, etc.
That's where rate lock timeframes come from.  So in essence, bond investors are trading empty buckets of mortgages that are scheduled to be filled within certain timeframes.

When your mortgage loan takes longer than expected to close, the mortgage lender is assessed a fee by the bond investor that basically says: "You promised to place this mortgage in my 30 day bucket, but now I have to dump that mortgage into my 45 day bucket.  So you need to pay the same higher price as all those other loans in that 45-day bucket.  In addition to that, I'm going to charge you a fee for the privilege of changing buckets at the last minute."

Here are three things you can do ahead of time to prepare:

1. Lock your rate for a longer timeframe than you anticipate needing (45 days vs. 30 days, etc.).
2. In the rate lock agreement, get a written commitment from the lender to underwrite and process your mortgage within a certain timeframe once you provide all the requested information.
3. Turn in all your documents BEFORE you start shopping for a house.  Although the lender can't require you to do so, you can volunteer to do so.  This may be in your best interest if it would help reduce the risk of rate lock extension fees, or if it would shorten your rate lock period once you do find a house.