It is often said that generosity is its own reward, and most people would agree that this is certainly the case. But when it comes to estate planning, there are a number of different ways that you can give generously while receiving something back at the same time, and tax-free gift giving is one of them.
It would make a lot of sense to simply give gifts to people that you love while you are still alive so that 35% of your hard-earned assets are not swallowed up by the estate tax. Unfortunately there is a gift tax in place that comes in at the same 35% rate. There is a lifetime gift tax exemption of $5 million, but it is unified with the estate tax exclusion. So if you were to give tax-free gifts equaling $5 million throughout your lifetime, all of your estate would be subject to the estate tax. Therefore, utilization of the lifetime gift tax exemption does not provide estate tax efficiency.
However, there are some additional gift tax exemptions that you can take advantage of that do not impact the lifetime unified estate/gift tax exemption. One of these allows for medical gift giving. You can pay the medical bills of an unlimited number of people as a gift, free of the gift tax, and these gifts can equal any sum of money.
They do have to be utilized to pay for necessary medical treatments; in other words you can’t pay for someone to have a face lift or some other form of elective cosmetic surgery free of taxation. Aside from treatment costs, you can also pay for health care insurance as a tax-free gift, and this can include some forms of long-term care insurance.
Considering the high cost of health care and medical insurance, giving these gifts can reduce the value of your estate for estate tax purposes considerably. At the same time, the financial assistance that you are providing can be a godsend to a friend or relative who is experiencing medical problems.
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.