Depending on one’s family situation, making lifetime gifts may be an excellent strategy to minimize overall estate taxes, and to ensure that more of your hard-earned property goes to your family and not the government.
Current Exclusion Amount
The current federal gift tax annual exclusion allows each individual to give up to $14,000 each year to an unlimited number of donees entirely free of tax. This exclusion is available for outright gifts of property, cash, and other assets, and for gifts made to certain types of trusts.
Double the Annual Exclusion Amount
This annual exclusion may be doubled for a husband and wife who file a married filing joint tax return. This means that Grandma and Grandpa can make combined annual gifts of up to $28,000 to each child, grandchild, church, charity, etc.
Significant Tax Savings
The federal estate tax rate is 40 percent and applies to taxable estates that exceed $5,450,000. Therefore, depending on your individual family situation, each lifetime gift of $14,000 could save your family $5,600 in taxes. Although the $5.45M federal estate tax exemption is not relevant for most families, the state exemptions are significantly less. For example, the exemption in CT is $2M and in MA is $1M; accordingly, a gifting program may yield significant savings at the state level also.
Some “Gifts” Are Not Taxable
If structured properly, paying the medical expenses, health insurance premiums, or the school tuition of another person is not a taxable gift. Any such payments must be made directly to the healthcare provider or school. These gifts may significantly increase the amount that a donor can transfer free of gift or estate tax because Grandma and Grandpa could, for example, pay a grandchild’s full school tuition and health-insurance costs, and give another $28,000, without incurring any gift tax liability.
Joe received his law degree from the University of North Carolina–Chapel Hill School of Law and his Accounting degree from the University of Rhode Island. He is admitted to practice law in Connecticut, Massachusetts, and Rhode Island, and he is a CPA. He is an Adjunct Professor and lecturer at the University level and has been a frequent speaker on business planning and legal matters.