If your estate is subject to the federal estate tax the first thing that crosses your mind might be to simply give gifts to your heirs while you’re still alive. This makes a lot of sense on the surface, but the powers-that-be know that this would be a logical way to avoid the estate tax. So there is a gift tax in place as well, and it carries the same rate as the estate tax. (That rate is 35% right now.)
You may have heard that there is a lifetime gift tax exemption of $5 million, and this is true. But, it is unified with the $5 million estate tax exclusion. So if you were to give gifts totaling $5 million during your lifetime using this exemption, the rest of your estate would be subject to the estate tax on your death.
Because the estate and gift tax exemptions are unified, just making outright gifts is not going to help you gain estate tax efficiency. But there are other gift tax exemptions you may want to consider. One allows you to directly pay the medical bills of other people without having it counted against your exemption, regardless of how large the medical bills. This exemption also includes the purchase of health care insurance and even long-term care insurance in some instances.
Another type of tax-free gift you can give to reduce the value of your estate for estate tax purposes is the gift of education. You can directly pay the school tuition of students as a tax-free gift. But you can only pay the tuition using this exemption; you can’t pay for fees, books, and living expenses as a tax-free gift. However, there is a $13,000 per person annual gift tax exemption as well so you could use this to provide your student with some cash resources.
Tax-free gifting is a good way to reduce the value of your estate to stay within the estate tax exclusion, and giving feels good. It is something you may want to consider when you are devising a estate planning strategy.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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