When the new tax bill was passed at the end of last year the parameters of the gift tax were changed for the better. The rate of the tax was reduced to 35%, and though this is certainly no picnic, it is an improvement over the 55% that would have been in place had this measure not been passed. In addition, the lifetime gift tax exemption was raised from $1 million to $5 million.
However, the estate tax and the gift tax are unified, so if you utilize your $5 million gift tax exemption by gifting during your lifetime, the entirety of your estate would be subject to the estate tax, which also carries a rate of 35%. So, removing assets from your estate by utilizing the lifetime gift tax exemption does not provide you with added estate tax efficiency at the time of your death. There are many good reasons to consider making lifetime gifts and utilizing all or part of your exemption, but the point is you can transfer only a total of $5 million tax-free and do so either during life or at death.
The good news is that there are some additional gift tax exemptions that can be utilized that can enable you to reduce the taxable value of your estate by giving gifts to your loved ones while you’re still alive to see the smiles cross their faces. One of these is the $13,000 per person annual exemption. You can make gifts totaling as much as $13,000 to an unlimited number of recipients each year free of the gift tax without impacting your unified gift/estate tax exclusion.
Since this is a per person exemption, you and your spouse could give as much is $26,000 to as many people as you would like every year. If you plan ahead this type of gift giving can go a long way toward reducing the value of your estate as you incrementally transfer assets to your eventual heirs in a tax-free manner.
You can also pay the tuition of as many students as you would like free of the gift tax. In addition, there is a medical gift tax exemption. You can pay the medical bills of as many people as you want and even pay for health care insurance without incurring any gift tax liability. So in spite of the unification of the gift and estate taxes there are still a number of ways to use gift giving as part of your tax efficiency strategy.
Larry Parman
Founding Attorney
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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