If the value of your estate exceeds the estate tax exclusion that is in place at the time of your death your heirs may be faced with a very large tax bill. As of this writing the estate tax exclusion threshold is $5 million, but this level is not etched in stone by a long shot. When the tax relief measure that took effect at the beginning of this year expires at the end of 2012, the estate tax exclusion goes down to just $1 million and the rate of the tax shoots up to 55%.
Should you inventory your assets – don’t forget the death benefit of life insurance – and find that your legacy is exposed to the estate tax your first thought may be to give away some of your assets while you’re still alive to heirs who would have otherwise inherited them. This make sense. Just remember there is a gift tax in place and it is unified with the estate tax. So the exclusion figures stated in the first paragraph above include both your estate and any gifts that you give using your unified estate/gift tax exemption.
In spite of this, you can still make tax-free gifts in order to create estate tax efficiency. There are some exemptions that exist, and one of them allows every taxpayer to make gifts totaling as much as $13,000 to any number of people every year free of the gift tax. There is no limit to the number of people you can make this gift to. If you’re married, you and your husband or wife could give as much as $26,000 to any number of recipients annually, and these gifts do not count toward your lifetime unified gift/estate tax exemption.
You can also pay the medical expenses of as many people as you want as a gift free of the gift tax, and this includes picking up the tab for health care insurance. In addition, you can pay the school tuition of any number of students as a gift without incurring any gift tax liability.