When you are interested in reducing the value of your estate in an effort to gain estate tax efficiency, you may want to consider the practice of tax-free gift giving. Of course, the tax man is well aware of the fact that people could choose to give their assets away to their heirs before they pass away in an effort to sidestep the estate tax. So there is a gift tax in place to close this potential loophole, and the rate of taxation mirrors that of the estate tax. There is a lifetime gift tax exemption, but it is unified with the estate tax exclusion so if you use any portion of it to give a tax-free gift, your estate tax cushion is reduced by the amount of that gift.
However, there are additional gift tax exemptions that do not impact the lifetime unified exclusion, and one of these is the $13,000 per person annual gift tax exemption. Each individual is entitled to give gifts valued at as much as $13,000 each year to an unlimited number of recipients totally tax-free. This is a per-person exemption, so if you are married you and your spouse could choose to pool your respective exemptions and give tax-free gifts of up to $26,000 per year to as many different people as you would like to. To take this a step further, a couple could give a total of $26,000 per year to their child and their child’s spouse, making annual tax-free gifts of up to $52,000 possible.
If you think long term and use this exemption creatively, you could reduce the value of your estate considerably over a period of years while transferring assets to your heirs free of taxation. And because you are doing so while you are still alive, you can experience the ineffable joy that goes along with an act of giving.
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.