A comprehensive estate plan typically incorporates a wide variety of estate planning strategies and tools. Many of those strategies and tools are aimed at reducing an estate’s exposure to gift and estate taxes. The overall key to reducing gift and estate taxes is to transfer as many assets as possible out of your estate prior to your death as possible. One way to accomplish this is to make use of the annual gift tax exclusion.
Gift and estate taxes are potentially levied on the estate of a taxpayer after death. Your estate’s gift and estate tax liability is based on the total value of your estate at the time of death plus the total value of qualifying gifts made during your lifetime. Each taxpayer is entitled to exempt up to the current lifetime exemption amount before taxes become due. Thanks to the American Taxpayer Relief Act of 2013, or ATRA, the lifetime exclusion limit was permanently set at $5 million, adjusted annually for inflation. Assets and/or gifts that exceed that amount are taxed at a maximum rate of 40 percent.
The annual gift tax exclusion allows you to gift up to $14,000 to as many beneficiaries as you wish each year tax-free. Gifts made pursuant to the annual gift tax exclusion do not count toward your lifetime exemption limit. If you are married, you and your spouse can combine your gifts to gift assets valued at up to $28,000 each year. To see how much your estate could benefit from using the annual gift tax exclusion, imagine that you and your spouse have four children to whom you gift the maximum amount each year for 15 years. You will be able to gift $112,000 each year. At the end of 15 years you have transferred $1.68 million in assets to your children tax-free.
For a taxpayer with a moderate to large estate, the annual gift tax exclusion can be a valuable estate planning tool. The beneficiaries are not limited to immediate family members. You can gift to nieces and nephews, friends, even charities. By using the annual gift tax exclusion wisely you should be able to transfer a significant amount of assets out of your estate prior to your death without those transfers counting toward your lifetime exemption limit. Talk to your estate planning attorney about how to best incorporate the annual exclusion into your estate plan.
Stephen A. Mendel, Estate Planning Attorney
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