Gift tax is not something many people think about, and for good reason: it will not affect the majority of taxpayers in any appreciable way. However, it can make a significant difference to wealthy givers who make large gifts in an effort to pare down an estate, and while the exemption is high, it is not limitless. As with most things, it is better to understand the rules and not need to use them than to wind up affected by them when you did not understand them.

It is important to note at the outset that the gift tax and estate tax are tied together for purposes of the exemption. Gifts made during the lifetime of the decedent over $14,000 will count against the estate tax exemption when estate taxes are levied. This is done so that dying persons cannot gift the entirety of their estate in the moments before their death, thus cheating the federal government out of estate tax revenue. Currently, that exemption amount is $5.43 million for the 2015 tax year. Married couples can combine their lifetime exemptions and mutually give $10.86 million tax-free. With these large exemptions indexed to inflation, the size of lifetime tax-free gifts will only continue to grow, allowing those with large estates the ability to continue lifetime gifts.

As noted, though, lifetime gifts will count against the estate tax exemption, so careful financial and estate planning is necessary to make sure that opportunities for taxation are limited. Once the amount of lifetime gifts exceeds the exemption amount, gift taxes (if the giver is alive) and estate taxes (if the giver is dead) kick in. The top estate and gift tax rate for 2015 is 40 percent, so any gifts made by an individual in excess of $5.43 million will be taxed at that rate. The giver of the gift also pays the tax. By way of example, if Smith gives to Jones a gift worth $10.43 million, Smith will then have to pay a gift tax of an additional $2 million that year (40% of $5 million after the $5.43 million gift tax exemption amount is applied to the $10.43 million gift). Of course, if Jones was the spouse of Smith, there is an unlimited marital deduction and the gift passes tax-free.

There is also currently an annual gift tax exclusion of $14,000 per recipient, so a giver could make gifts of $14,000 each to unlimited numbers of family members, friends - even strangers - and none of them would reduce the lifetime gift tax exemption. Married couples who split their gifts qualify for a $28,000 annual gift tax exclusion. However, it should be noted that if a married couple decides to utilize their combined $28,000 annual gift tax exclusion, a gift tax return must be filed informing the IRS of this "split-gift."

For those with large estates and the desire to make large gifts, the gift tax is a crucial consideration, as it can incur very large and current tax penalties for the unwary, as well as chip away at the exemption to be eventually shared with the estate tax.