Estate planning is all about making preparations for giving, and of course these gifts are going to change hands after you pass away. However, you can actually take action while you are still alive by giving gifts to the people that you intend to leave bequests to eventually. This practice can serve multiple purposes. For one, you get the personal satisfaction that goes along with an act of generosity. For another, you proactively transfer assets free of taxation. And thirdly, as you are giving gifts you are reducing the overall value of your estate for estate tax purposes.
One thing to consider when you are contemplating gift giving is the fact that there is a gift tax in place. The estate tax and the gift tax are unified, and there is a $5 million unified exclusion that can be used to give gifts in a tax-free manner. But, if you were to give $5 million in gifts during your lifetime using this exclusion the entirety of your estate would be subject to the estate tax. So giving gifts using this lifetime exclusion is not going to provide you with any estate tax efficiency.
However, the lifetime exclusion is not the only gift tax exemption. Each individual is entitled to give as much as $13,000 to any number of recipients each year as a tax-free gift. Since this is a per person exemption a married couple could give as much as $26,000 tax-free.
So if you want to bestow a gift on your daughter and her husband both you and your spouse could give each of them $26,000 every year, equaling a total annual tax-free transfer of $52,000. If you were to give these gifts over a number of years you could wind up transferring a significant sum of money without incurring any tax liability. And while you are doing so you would be reducing the value of your estate and mitigating your eventual estate tax exposure.
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- Leaving Assets Can Be Tricky – Part 3 - August 13, 2020