Limit Tax Exposure by Cutting Your Estate Down to Size

Volume 1 Issue 2007

The continued uncertainty regarding the fate of the federal estate tax complicates planning for anyone who might have a taxable estate. As things stand now, estates worth up to $2 million can avoid taxation, and that threshold increases to $3.5 million for 2009. While estate-tax repeal is still on the books for 2010, the tax is reinstated the very next year with a significantly lower exemption amount of $1 million.

Time To Take Action?

The prospect of a continuing federal estate tax may make you uncomfortable adopting a strictly wait-and-see approach to planning. If you’d prefer doing something now to address potential estate taxes, you might consider reducing the value of your estate by making lifetime gifts that won’t be subject to gift taxes, or use up any of your available gift-tax credit. (The gift-tax credit offsets gift-tax liability on cumulative transfers of up to $1 million.)

Annual Exclusion Gifts

Each year, you can give up to $12,000 per recipient (as adjusted for inflation) without gift-tax consequences. Married couples can give up to $24,000 per recipient. Thus, a series of annual gifts could remove a substantial amount from your estate relatively quickly.

Example. Craig has four children and six grandchildren. He can remove $600,000 from his estate in five years’ time by giving each of them $12,000 a year. Instead of giving cash, Craig might want to give securities, real estate, or other assets that are likely to go up in value. That way, any future appreciation would also be removed from his estate.

Note that each gift recipient must have immediate possession and use of the gift. So, gifts in trust often do not qualify for the annual exclusion. Exceptions apply.

Payments of Medical Expenses and Tuition

The tax law allows you to pay another person’s medical expenses or school tuition on a gift-tax-free basis. To qualify for this tax-saving provision, you must pay the medical provider or the educational institution directly. There are no restrictions on the amount of expenses you can pay, and your payments will not count against the annual exclusion limit.