Financial success is the goal, and for the most part, it is very rewarding when you reach you accomplish your financial objectives. At the same time, there are some challenges that go along with wealth building.
When you are planning your estate as a high net worth individual, you have to be aware of the potential imposition of the federal estate tax. This tax carries a 40 percent maximum rate, so your family can lose a significant amount of wealth if the estate tax is a factor for you.
There are no federal transfer taxes on transfers between legally married spouses, regardless of gender, because there is an unlimited marital deduction. Transfers to others are potentially subject to the estate tax.
Federal Gift Tax
The logical response to the estate tax would be lifetime gift giving. This was possible in the early days right after the enactment of the federal estate tax in 1916. Eight years later, a gift tax was installed to stop people from giving tax-free gifts to avoid the estate tax. This tax was repealed two years later, but it was reenacted in 1932. It has been in place since then, and during the 1970s, the gift tax was unified with the estate tax.
Annual Gift Tax Exclusion
Each and every gift that you give is not going to be subject to the gift tax, because there are exclusions. One of them is the annual per person gift tax exclusion. During a given calendar year, you can give as much as $14,000 to an unlimited number of gift recipients without incurring any gift tax exposure.
To be clear, there is no limit to the total amount that you can give in tax-free gifts each year, as long as you do not give more than $14,000 to any particular individual.
Unified Gift and Estate Tax Exclusion
In addition to the annual gift tax exclusion, there is also a unified lifetime gift and estate tax exclusion. You could use a portion of this exclusion to give tax-free gifts to individuals within a calendar year that do exceed $14,000. In 2016, the amount of this exclusion is $5.45 million.
So, to provide a simple example, let’s say that you give a $14,000 tax free gift to your son in March using the annual gift tax exclusion. Later in the year, you give your son a $1.45 million gift to start a business. You could give that gift tax-free using a portion of your unified gift and estate tax exclusion.
The $1.45 million would be deducted from the total $5.45 million exclusion that is allotted to each taxpayer. This would leave $4 million left to apply to your estate and any future large gifts that you give during your life.
There are a couple of other ways that you can give tax-free gifts while you are living. We have an educational gift tax exclusion in the United States. If you want to pay school tuition for students, you could do this without incurring any gift tax liability.
This exclusion does not extend to living expenses, books, and college fees, and you cannot give the tuition money to the student directly.You have to pay the institution.
When it comes to these additional expenses, you could use your $14,000 per person annual gift tax exclusion to provide some additional support. Plus, if you are married, you and your spouse would have a total of $28,000 that you could give to others tax-free within a calendar year.
If you want to pay medical bills for someone as a gift, you can use the medical exclusion to give the gift in a tax-free manner. This exclusion extends to the purchase of health insurance that would benefit someone else.
You are really not getting any transfer tax efficiency if you use the unified lifetime gift and estate tax exclusion to give tax-free gifts, because you are reducing the amount that would be left to apply to your estate.
However, the utilization of the $14,000 per person annual exclusion can be part of an estate tax efficiency strategy. Direct gift giving is a possibility, but you can also use this exclusion to fund a trust, and it can be used to distribute shares in a family limited partnership.
Schedule a Consultation
If you engage in the proper planning, you can protect what you have earned so that you can leave behind a meaningful legacy to your loved ones. Our firm can help if you would like to learn more about the estate tax efficiency strategies that can be utilized.
To set up a consultation, call us at (317) 684-1100 or send us a message through our contact page.