If you are fortunate enough to have a moderate to large estate to pass on to future generations you should be aware of the gift and estate tax repercussions of any gifts you make either during your lifetime or at the time of your death. Waiting to gift your entire estate at the time of your death could subject your estate to a hefty estate tax bill at the high rate of 40 percent. In St. Louis, one tax friendly estate planning tool that is often overlooked is the annual gift tax exclusion. Incorporating the annual gift tax exclusion into your estate plan could save your estate a small fortune in gift and estate taxes, thereby leaving more for your beneficiaries.
As you may already know, one purpose of probate is to determine if your estate owes Uncle Sam gift and estate taxes. The value of all lifetime gifts combined with the value of all assets owned by you at the time of your death is subject to the taxation. Each taxpayer, however, is entitled to exempt up to the lifetime exemption amount which was set at $5 million (adjusted annually for inflation) in the American Taxpayer Relief Act of 2013, or ATRA. If your estate value exceeds the lifetime exemption amount it will incur gift and estate taxes. Making use of the annual gift tax exclusion can significantly decrease your estate’s value at the time of death, thereby decreasing your tax exposure.
The annual gift tax exclusion in St. Louis allows you to make gifts each year valued at up to $14,000 each to an unlimited number of beneficiaries. You may also combine gifts with a spouse to increase the value of the gift to $28,000. To see how using the annual gift tax exclusion can benefit your estate, assume that you and your spouse have three children and five grandchildren. Assume further that you begin making annual gifts when you are age 50. Therefore, by “gift-splitting” (combining gifts with your spouse) you are able to transfer $224,000 out of your estate each year by making gifts to each of your children and grandchildren. If you continue making gifts until retirement age 65, you will have transferred $3.6 million dollars out of your combined estate. If you continue gifting until you reach age 75, you will have gifted $5.6 million tax-free. Not only are these yearly gifts tax-free but they do not count toward your lifetime exemption limit either.
Because there are some limits and exceptions to the annual gift tax exclusion in St. Louis, be sure to consult with your estate planning attorney about incorporating the exclusion into your estate plan.
- The Magic of Grantor Trusts - November 1, 2023
- IRS Confirms Grantor Trust Status Alone Does Not Cause a Step-Up in Basis - October 26, 2023
- Understanding the Importance of the Simultaneous Death Act - October 19, 2023