As complex as estate planning is in a general sense, many of the finer points involved in creating a sound plan can be even more confusing for the average person. Take estate taxes, for example. You will often hear analysts and others dismiss concerns about this tax on the basis that only about one percent of estates are ever subject to its provisions at the federal level. While there is some truth to that argument, it fails to address a broader truth: though the current law exempts estates with values less than $5.49 million, laws change all the time. Smart planning tries to take into account not only what the law is today, but also what it will likely look like in the near future.
So, despite the fact that Indiana currently has neither an estate nor an inheritance tax, each had a place in state law at some time in the recent past. There is certainly nothing to preclude a future legislature and governor from reinstating one or the other, and that could leave your estate subject to that future tax. The same is true for the current federal exemption. While it stands at nearly five and a half-million dollars today, a future Congress could decide to lower it significantly – to once again encompass smaller estates. Effective estate planning today can help to minimize how future changes impact your estate. Part of your planning should involve making the most of the annual gift tax exclusion.
What is the Annual Gift Tax Exclusion?
The annual gift tax exclusion is a lawful exemption on certain gifts that you make each year. The estate tax exemption of $5.49 million essentially allows you to give away up to that amount to others over the course of your lifetime. If you have a spouse, then your combined exemption from the gift and estate tax is doubled. The annual exclusion is an additional opportunity to reduce the value of your estate over time through judicious gifting.
Currently, the annual gift allowance is set at $14,000. Using this exemption, you can give a total of $14,000 to any individual – gifts that can be in monetary form or even other assets like stocks, bonds, or real estate. You can make these gifts to as many people as you like, just as long as none of them receive more than that limit. Anything over that amount would be subject to the gift tax.
Reducing the Value of Your Estate
That exclusion can provide you with a powerful tool to reduce the value of your estate while you are still alive, to minimize the risk that it might one day fall prey to the estate tax. Because the limits are imposed on your gifts to any given individual, you can actually maximize your giving in certain ways. For example, if you are married then both you and your spouse can give that same amount to the same person – effectively doubling your gift to $28,000 a year. Moreover, if that person is married, you can gift that $28,000 to each of the spouses – for a combined annual gift of $56,000.
Since there are no limits on the number of people to whom you can make those gifts, this strategy can provide you with an incredible amount of flexibility when you are trying to limit your estate exposure to the tax. Just this one tool alone can help you to reduce the value of your estate by a significant amount in any given year. And since it is an annual limit, you can repeat the gifting process on a yearly basis, for as many years as you choose.
Additional Exclusions to Consider
Once people with sizable estates figure out how to properly use the annual gift exclusion, it can be easy to assume that other strategies might not be quite as important. In some instances, however, you may be able to provide even greater benefits by also utilizing certain other exclusions.
- The Tuition Exclusion. You can legally give an unlimited amount to children, grandchildren, and others by gifting money that is devoted to their tuition. To qualify, the money needs to paid directly to the school or university, and it only applies to the actual cost of tuition.
- Medical Expense Exclusion. If you have a relative with serious medical problems, you can also gift money to pay for the cost of medical care. Again, this money must be paid directly to the hospital or doctors providing services, and not to reimburse your loved one for expenses already paid. Other restrictions may apply as well.
Failure to Act: The Consequences
It can be tempting to put off action or ignore estate tax implications altogether. That is almost always a bad idea. As noted earlier, today’s laws might not seem to apply to your estate, but those laws can and probably will change in the future. If, for example, the lifetime exemption was once again reduced while every other provision in the law remained the same, your estate could end up being subject to a 40% tax rate on any part of it that exceeds those new limits.
To avoid the consequences of future changes in the law – and to ensure that your estate is properly protected as it continues to grow throughout your life, it is important to plan ahead. And, as with any other type of planning in life, the maximum benefits can only be realized when you begin that planning process early.
At Frank & Kraft Attorneys at Law, our legal team has the estate tax and planning experience you need to help secure your assets from unnecessary taxation in the future. Our commitment to clients just like you in the Indianapolis and surrounding areas ensures that we work with you to develop the perfect strategy to effectively manage all of your estate planning needs. If you’d like to find out more about the estate tax, gift tax exclusions, or any other aspect of estate planning, contact us online today or give us a call at (317) 684-1100.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.