Most people who have an interest in estate planning are aware of the fact that the parameters of the estate tax changed as a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. We now have a 35% maximum rate of taxation and a $5 million exclusion. What was lesser publicized is the fact that the gift tax is also carrying a $5 million exemption and 35% top rate to mirror the estate tax with which it is unified. The generation-skipping transfer tax was also altered to match the $5 million/35% framework.
Tax-free gift giving can be a great way to reduce the value of your estate for estate tax purposes, but it is important to understand the implications of the unification of the gift and estate taxes. The $5 million exemption applies to a combination of both the tax-free gifts that you give and the assets that comprise your estate. So if you were to give say $2 million in gifts throughout your life using the gift tax exemption, only the first $3 million of your estate would pass to your heirs free of the estate tax. So gift giving using the unified lifetime exemption is not really going to provide you with any estate tax efficiency.
However there are some gift tax exemptions that can be used effectively to remove assets from your estate in an effort to gain tax savings. Each individual to allowed to give gifts totaling $13,000 to an unlimited number of recipients each year free of the gift tax. You can also pay the tuition of students as a gift without incurring any gift tax liability. In addition, there is a medical exemption allowing you to pay the health care expenses of others as a gift free of taxation, and this includes medical insurance premiums.
Tax-free gift giving is not only a way to gain estate tax efficiency, but it is also a very straightforward and effective way to transfer assets to those who would otherwise be inheriting them while you are still alive.