Dear Carrie: On the $1 million lifetime exclusion: Is that per recipient or giver? Is the $1 million exclusion per spouse or per family? -- Debbie

Dear Debbie: Just about everything having to do with gift taxes is confusing for a lot of people, so thanks for asking the question. I'll start with the simple answer to your question about the exclusion, and then get into some of the details that often muddy the waters.

According to the IRS, a gift is the transfer of money or property to an individual where no compensation is received in return. Again, according to the IRS, the general rule is that any gift is a taxable gift -- and it's the giver, not the recipient, who may have to pay taxes. Fortunately, as with most rules, there are exceptions. The $1 million lifetime exclusion is just one. To answer your question directly, this exclusion is per donor, and it basically means that an individual can give away up to $1 million in the course of his or her lifetime without having to pay gift taxes.

How this lifetime exclusion relates to the annual exclusion -- and what does and doesn't have to be reported -- is what often causes confusion. To help clarify, I'll outline the basics of how these two work together.

THE ANNUAL EXCLUSION PLUS THE LIFETIME EXCLUSION

Currently, an individual can give up to $13,000 a year to anyone -- and to an unlimited number of people -- without incurring gift taxes. (This amount is periodically adjusted for inflation). These gifts don't even have to be reported. A married couple can agree to split gifts and give up to $26,000 a year to the same individual gift-tax free.

The great, and sometimes confusing, aspect of the annual exclusion is that it is separate from the $1 million lifetime exclusion. It's only when you give more than $13,000/year to any one individual that your gift counts toward your lifetime exclusion and has to be reported.

SOME SIMPLE EXAMPLES

On the simplest level, this means that if you give one person $1.13 million in a year, you would have to report the $1 million gift and you'd be at your lifetime exclusion limit. After that, you could continue to give any number of people $13,000 per year without paying a gift tax. But as soon as you gave one individual more than $13,000, you'd have to report it and pay taxes on the added amount.

Now, of course, it's the rare person who can give away $1 million in a lump sum, so the $1 million exclusion is cumulative. Here's an example of how the numbers can add up.

Let's say you have two children and four grandchildren. As an individual, you can give each of these six people $13,000 per year without having to report the gifts or pay gift taxes. Continued...