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Estates & Trusts

Gifting – An Important and Powerful Estate Planning Tool

By August 22, 2016No Comments

Do you want to make gifts to your loved ones and reduce the tax you pay when you pass away? Most people do not like to think about planning their estate, but, a well-planned gift-giving program will effectively reduce your estate tax and ensure the financial security of your loved ones. As of 2016, the maximum estate and gift tax rate is 40 percent, a rate that will significantly decrease the assets passed on to your heirs. There are several strategies that can be used to reduce these taxes which include maximizing your lifetime gifts, making annual tax-free gifts, and paying certain expenses on behalf of your loved ones.

Planning Tip #1: Make Lifetime Gifts

As of 2016, the lifetime estate and gift tax exclusion is $5.45 million per person. The exclusion amount allows $5.45 million of assets to be gifted during your lifetime or passed onto your heirs when you pass away without paying estate or gift taxes. If you are married, you and your spouse can make tax-free gifts up to $10.9 million. This exclusion is typically indexed for inflation each year, but can be significantly increased or decreased by tax legislation. You can take advantage of increasing lifetime exclusions by maximizing your gifts each year. The 2015 exclusion was $5.43 million and was increased to $5.45 million in 2016. For example, if you made $5.43 million gifts in 2015, you can gift an additional $20,000 to your beneficiaries in 2016 without paying any gift tax. This additional $20,000 does not include the annual gift tax exclusion which we will discuss next.

Planning Tip #2: Take Advantage of the Annual Exclusion

As of 2016, you can make tax-free gifts up to $14,000 to any person on an annual basis. For example, if you make $14,000 of gifts to three different individuals this year, you end up transferring a total of $42,000 out of your estate without using any of your $5.45 million life-time exclusion and without paying any gift tax. Your spouse can give the same recipients $14,000 each without using their own $5.45 million lifetime exclusion or paying any gift tax. It is essential to consider this annual gift giving strategy for estate and gift tax planning purposes.

Planning Tip #3: Pay for Medical and Educational Expenses

In addition to the annual $14,000 annual gift tax exclusion, you can pay an unlimited amount of medical and educational expenses for any individual without triggering gift tax or using your lifetime exclusion. In order to be treated as a tax-free gift, payments for medical expenses must be paid directly to the health provider. Similarly, tuition payments must also be made directly to the educational institution.

If carefully planned, a gift-giving program can benefit both you and your heirs. If you have any questions regarding estate planning and gifting strategies, please contact your L&B professional for more information.

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