There is a federal estate tax to contend with if you have been particularly successful throughout your life. During 2016, the amount of the federal estate tax exclusion is $5.45 million. You can arrange for the transfer of assets equaling as much as $5.45 million before the estate tax would kick in. The new amount for 2017 is $5.49 million.
The maximum rate of the federal estate tax is 40 percent.
When you hear the above you may have an idea: why not just give gifts while you are living to avoid the estate tax?
This is the same idea that wealthy people had back in 1916 when the estate tax was enacted. At first, people did in fact give away assets to their heirs to avoid the estate tax. The tax man was not keen on this idea, so a gift tax was enacted in 1924 to close this loophole.
It was repealed for several years, but it returned to stay in 1932. In 1976 it became unified with the federal estate tax.
Unification of Federal Gift and Estate Tax
This $5.45 million exclusion that we touched upon in the first section is a unified exclusion. It applies to the taxable gifts that you give while you are living coupled with the value of your estate as it is being passed on to your heirs.
To paint a simple picture, if you gave away $5.45 million during your life tax-free using the unified exclusion, the entirety of your estate would be subject to the estate tax. You would have used all of your unified transfer tax exclusion giving gifts.
Annual Gift Tax Exclusion
Using the unified transfer tax exclusion to give tax-free gifts while you are living will just delay the inevitable. However, there is another gift tax exclusion that you can use that will provide tax savings.
In addition to the unified exclusion, there is also an annual per person gift tax exclusion. You can give gifts up to a certain amount to an unlimited number of gift recipients each year free of taxation.
In 2016, the amount of this annual gift tax exclusion is $14,000. You would not be using any of your unified lifetime exclusion to give gifts to any particular person during the calendar year, unless it exceeded $14,000.
This exclusion is allotted to each individual taxpayer. Because of this, you have a $14,000 annual exclusion, and your spouse also has a $14,000 annual exclusion assuming you are married.
As a couple, you could give as much as $28,000 to any number of people within a calendar year free of the gift tax. If you are trying to reduce the amount of your taxable estate while you transfer assets tax-free, this would be an avenue to explore.
Since the unified lifetime exclusion is $5.45 million, an annual gift tax exclusion of $14,000 may not sound like much. However, using this exclusion over a number of years can indeed have an impact. Because a couple could give $28,000 tax-free to any number of individuals, you and your spouse could transfer $56,000 annually by giving $28,000 to one of your children and his or her spouse.
If you have multiple children and perhaps married grandchildren that you would like to give gifts to, utilization of the annual gift tax exclusion could actually be quite effective as part of a tax efficiency strategy.
Direct gift giving is not the only way to utilize this annual gift tax exclusion. Many people who are interested in asset protection and tax savings will utilize the structure called the family limited partnership.
The person creating the partnership is typically going to act as the general partner. The general partner can distribute shares in the partnership to limited partners. The limited partners must be family members.
If you give a limited partner a share in property that has been conveyed into the partnership, you are giving this individual a gift that is potentially taxable. However, you could utilize the annual gift tax exclusion to give gifts of partnership shares that are valued within the amount of the exclusion each year.
These gifts would be tax-free.
The annual gift tax exclusion can also be used to fund various types of irrevocable trusts in a tax-free manner.
Let’s Meet One Another!
People often drag their feet when it comes to estate planning, because it can be difficult to begin a relationship with an attorney that you have never met. We understand this dynamic, and as a response, we offer free seminars on an ongoing basis.
If you attend the seminar that fits into your schedule, you can get to know us, and you will qualify for a free consultation if you decide to go forward. https://collinslawgroup.comseminars/