Gift Giving as an Estate Planning Tool

How can I minimize the tax consequences when planning my estate?

As many high net-worth individuals know, an estate with a value up to $5.45 million is exempt from federal estate taxes ($10.9 million for married couples), and there is no estate tax in California. For those who have acquired assets above the exemption threshold, year-end gift-giving provides a way to transfer wealth to their beneficiaries while minimizing the estate tax that may ultimately be due. The Internal Revenue Service defines a gift as any transfer to an individual, either directly or indirectly, where full consideration is not received in return.

What is the annual gift tax exclusion?

In order to reduce the estate’s value, high net-worth planners can make annual gifts to loved ones while they are alive. Currently, the annual gift tax exclusion is $14,000 for individuals and $28,000 for married couples. In addition, there is an aggregate lifetime exemption up to $5.45 million; however, the exemption applies to combined gift and estate taxes. This means that the exemption used for gift-giving will reduce the amount that can be used for the estate tax.

Further, there is no limit to the number of recipients who can receive tax free gifts which must be made by December 31st each year. Accordingly, one strategy for transferring larger gifts is to make a gift up to the annual exclusion amount by the end of the year, followed by another in January. In so doing, a savvy planner will qualify for the exclusion in both years.

That being said, gift-giving requires careful consideration for a number of reasons. First, some gifts made during an individual’s lifetime are subject to a gift tax (equal to the estate tax of 40 percent). In addition, gifts made that exceed the exclusion amount will be subject to a tax (for the excess amount). Moreover, excess gifts will reduce the estate tax exemption.

Non-taxable Gifts

Whether the gift is in the form of cash, stocks, real estate or other tangible or intangible property, if a tax is owed it is ordinarily paid by the donor. A number of gifts, however, are not taxable including:

  • Tuition paid directly to a school
  • Medical expenses that are paid directly to a beneficiary’s healthcare provider
  • Gifts to a spouse (who is a U.S. citizen)
  • Gifts to political organizations
  • Gifts to certain qualifying charities

In short, year-end gift-giving can enable high net-worth individuals to reduce the size of their estate and minimize the tax consequences. In any event, it is best to engage the services of an experienced estate planning attorney who can prepare the required transfer documents and ascertain the affect of the gift on the estate plan.

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