Inheritance Planning: Giving Early

When you break it down to its most rudimentary form, the inheritances that you give your family members are posthumous gifts.  So something to keep in mind is the fact that you could choose to gift assets to your loved ones while you’re still alive to see the smiles cross their faces. And the fact is, doing so could have very positive estate tax implications.

At the present time the estate tax exclusion stands at $5 million and the rate of the tax is 35%. So if your estate is worth less than $5 million you don’t have to worry about the estate tax…that is, if you’re certain that you will be passing away this year or next year.

When the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires at the end of 2012, the estate tax rate is scheduled to rise to 55%, and the exclusion is to be reduced to $1 million. So this is the figure that you should be working with at the present time if you have every reason to believe that you will be alive and kicking when 2013 rolls around.

If your estate is exposed to the estate tax you have to make an effort to gain estate tax efficiency. Intelligently reducing the value of your estate through annual gifting is one way of doing this. There is a gift tax in place, and its rate mirrors that of the estate tax. But there are exemptions, and one of these allows for the giving of up to $13,000 each year to any number of people, free of the gift tax.

This is a per person per done exemption.  That means you can make a gift of up to $13,000 each year to as many people as you want.  And a married couple can give $26,000 to an unlimited number of people. So if a couple wanted to give the maximum amount to their daughter and her husband each year they could actually give $26,000 to each of them individually, enabling a total transfer of $52,000 annually, all free of taxation.

Tax-free gifting is a good way to transfer some assets in a tax efficient manner while reducing your estate tax exposure in the process.

Larry Parman
Author, President and Founding Attorney
Parman & Easterday