You may be aware of the existence of the federal estate tax. This tax can significantly erode your wealth, because it carries a 40 percent maximum rate. There is a marital deduction that allows you to transfer unlimited assets to your spouse tax-free, as long as your spouse is an American citizen, but transfers to others can be subject to taxation.
Lifetime gift giving could seem like the solution if you are exposed to the estate tax. You could simply give your loved ones their inheritances in advance to sidestep this tax. Unfortunately, this is easier said than done, because there is also a gift tax in place. It exists to prevent people from implementing the lifetime gifting strategy as a way to gain estate tax efficiency.
The gift tax and the estate tax are unified, and there is a $5.43 million unified exclusion. This is the amount that you could transfer tax-free. Because of the unification of these taxes, giving lifetime gifts using this exclusion would not provide estate tax efficiency, because you would be reducing the amount that would be left to be applied to your estate after your passing.
Annual Per Person Gift Tax Exclusion
There is another gift tax exclusion that you could use to gain transfer tax efficiency. We have a $14,000 per year, per person gift tax exclusion in the United States in 2015. The first $14,000 in 2015 that you give to any number of gift recipients within a calendar year can be given free of the gift tax.
The utilization of this annual per person gift tax exclusion can be part of your tax efficiency plan if your estate is going to be exposed to the estate tax. Over time, a significant amount of money could be transferred tax-free.
For example, let’s say that you are married, and you and your spouse have five married children. As noted, in 2015, you have a $14,000 per year, per person annual exclusion, and your spouse has his or her own annual exclusion. As a couple, you could give up to $28,000 to an unlimited number of gift recipients each year free of the gift tax this year.
You could give $28,000 to each husband-and-wife, resulting in $58,000 in annual tax-free asset transfers to each couple. Since you have five married children, you would be transferring a total of $290,000 tax-free each year.
Direct gift giving is certainly a possibility, but you could also use this exclusion to fund certain types of trusts in a tax-free manner.
As you are transferring assets, you are reducing the value of your estate, so this is another tax efficiency benefit.
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If you would like to discuss taxation or any other estate planning topic with a legal professional, contact us through this link to set up a consultation: Sacramento CA Estate Planning Attorneys.