Making Gifts to Reduce the Size of Your Estate and Avoid Taxes

When your estate is over a certain size, you may wish to consider making annual gifts in order to reduce your potential estate tax burden when you die. The federal gift and estate tax regimes are part of what’s known as the “unified” tax. The gift tax applies to gifts made during life; the estate tax applies to assets left at death. The net effect is that whether you give your assets away during life or at death, these gifts are taxed in the same way and at the same rate. In addition, certain types of gifts can be made at any time without incurring tax. Many people with large estates take advantage of these tax-free gifts by incorporating a gifting strategy into their existing estate plan.

5 Types of Gifts That Can Be Made Tax Free

What types of gifts can be made without gift tax liability? The following are five examples:

  1. Make gifts that do not exceed $14,000 annually to any number of different recipients. This amount is known as the annual exclusion amount, which is set to increase over time. If you are married, the added bonus is that you and your spouse can make gifts of $28,000 per year per recipient without incurring a gift tax liability.
  2. Pay someone’s tuition by making payments directly the school. This type of gift can be made in any amount without triggering gift tax. It is important to note, however, that education-related expenses generally do not qualify for this exemption. Examples include books, supplies, and living expenses.
  3. Pay medical expenses directly to the health care provider. Similar to gifts made to pay tuition, this type of gift avoids a gift tax.
  4. Make gifts to certain charities. Charitable gifts generally do not trigger a gift tax liability.
  5. Make gifts to a political organization.

While the net effect may not necessarily reduce potential estate tax liability down the road, it is also important to note that gifts made to your spouse do not incur a gift tax liability.

An experienced attorney can help you understand the gifting strategies for an estate plan. We encourage you to contact us today at (714) 459-5481 for more information.

 

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