Gift and estate taxes can deplete your estate if you fail to establish an effective plan to transfer your assets to your heirs. One of the best ways to gradually transfer your estate is to use the annual exclusion and "gift" up to $14,000 per person to an unlimited number of recipients. If you and your spouse choose to split gifts, then $28,000 per recipient can be given away without you or the recipients paying transfer tax. (Gift-splitting is not necessary in community property states.)
You may also want to take advantage of the lifetime gift tax exemption. Under the 2010 Tax Relief Act, the Federal lifetime gift tax is reunified with the estate tax, with a top tax rate of 40% and exemption of $5.49 million in 2017.
If you would like to make a gift to a grandchild (or anyone else) and not be limited by the annual exclusion amount, make a direct payment to the providers for education (tuition only) and medical expenses. Gifts of this nature do not count toward the annual limit. You can also exclude gifts of tuition or medical payments made now for future services.
Gifts may be made directly to the donee or deposited in a trust for the donee's benefit. Many estates can be completely transferred to others in this way over time. There are special requirements when the trust beneficiary does not have a present interest in (does not enjoy current benefits from) the trust property. Gifts to such trusts do not qualify for the $14,000/$28,000 annual exclusions. In the case of trusts set up for minors, annual exclusion gifts are allowed, but beneficiaries must have full access to the trust assets at age 21.
To see how the reform affects exemption amounts, click here.
- Post-gift appreciation escapes the estate tax.
- To the extent of the $14,000/$28,000 per donee, per year annual exclusion, no transfer tax is ever imposed.
- Gift tax paid reduces your taxable estate. (Limited exceptions apply.)
- Post-gift income produced is taxed to lower tax bracket donees.
The $14,000/$28,000 gift tax annual exclusion can still be available to you for transfers to minors, even though their current access to the trust property and its income is severely restricted.