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Exempt Gifts Legal Tax Angles: How to Save Taxes Without Going to Jail Everyone gets to leave their heirs up to $1,000,000 free of any estate or gift tax. A married person can gift or bequeath an unlimited amount to a spouse. By dividing an estate, a couple can leave their children a minimum of $2 million - free of any estate or gift taxes. The exempt amount for estate taxes is scheduled to increase to $3 million per person (or to $6 million for a couple) by the year 2009. In the year 2010, the estate tax is supposed to be repealed entirely. However, in the year 2011, the estate tax will be restored to where it was in 2002 if the Congress doesn't extend the repeal or make it permanent. The gift tax is not scheduled to be repealed, but the rules will change when the estate tax is repealed. In addition, anyone can give up to $11,000 each year to as many people as they wish, free of any gift tax. If you have a large estate, and have a large family with eight children, eight spouses of your children, twenty grandchildren and ten spouses of your grandchildren, you could make tax free gifts each year of up to $506,000. Your spouse could do the same, resulting in a total of $1,012,000 a year of tax free gifts. Gifts for medical costs and education expenses that are paid directly to the medical provider or the educational institution are also free of any gift taxes. You could therefore pay for all of the medical costs of your family and most of their education costs without having to pay any gift taxes on those amounts. A hidden benefit of making lifetime gifts is that the future income and any future growth in the assets transferred to your family will be outside of your estate. For example, if you have $10,000 and those assets would earn 6% per year (after taxes), the $10,000 will become $20,000 in about 12 years. In 24 years, it will amount to $40,000 and in 36 years it will be $80,000. Thus, a $10,000 gift now could remove up to $80,000 from your estate 36 years later and preserve as much as $40,000 from being taken by the IRS. A gift of $10,000 a year for thirty years would remove up to $790,000 from your estate - assuming that the money could have been invested at 6% after income taxes. With income splitting, a married couple could gift away up to $1.6 million to each of their heirs - in addition to paying their medical costs and their education expenses. And, any lifetime annual gifts are in addition to the $1,000,000 lifetime exempt gifts or bequests. If you make gifts of that $1,000,000 before you die, you will remove the future growth and income on that amount from your future estate. In 12 years, that $1,000,000 is likely to double. In 24 years it will be $4 million and in 36 years, it will be $8 million. Thus, a gift of $1,000,000 36 years before you die could eliminate the estate tax on almost $8 million of assets. In addition, there are a variety of ways to reduce the value of your estate for purposes of the estate or gift tax. One of the most popular at this is the use of a family limited partnership. When you combine a program of lifetime gifting with substantial valuation discounts, you can often increase your exempt gifts by 50% or more. If you are concerned about having enough to live on while you are giving everything to your heirs, read the section on private annuities or the section about charitable trusts. And if you are concerned about leaving large amounts to your children while they are young, you can maintain substantial control over the assets with a family limited partnership. Vern Jacobs Copyright, 2003 |
Books and Services by Vern Jacobs
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