Gifting Your Way to Estate Tax Savings

If you have been fortunate enough to accumulate substantial assets during your lifetime, do you know that estate taxes could reduce the amount you’ll be able to pass on to your heirs? Under current law, the Federal estate tax in 2017 has an applicable exclusion amount of $5.49 million and a top tax rate of 40%. As a result, it is very important to develop an estate planning strategy that helps reduce the impact of estate taxes. By making gifts of existing assets during your lifetime, you can help reduce the size of your estate and lessen your family’s future estate tax burden.

Gift-Giving Basics

  1. The annual gift tax exclusion allows a donor to give away up to $14,000 (subject to inflation indexing) in 2017, per recipient, without incurring a gift tax liability. If the donor is married and his or her spouse consents to “splitting” the gift, the annual gift tax exclusion increases to $28,000, even if only one spouse actually makes the entire gift.
  2. Making gifts during one’s lifetime shifts future appreciation of gifted property to the recipient.
  3. Taxable income may be shifted from the high tax bracket of a donor to the lower tax bracket of a recipient, age 19 or older.
  4. No gift tax is paid out-of-pocket until taxable gifts exceed the lifetime gift exemption ($5.49 million for 2017). The Federal gift tax is cumulative. If the gift qualifies for the annual gift tax exclusion, it does not count against your lifetime exemption.

What about Life Insurance Gifts?

Life insurance can often be the single largest asset in a gross estate. If this is true in your case, you may wish to consider how to shield the death benefit proceeds from Federal estate tax liability. If, at your death, you own a life insurance policy, the death benefit proceeds will be included in your gross estate and could be subject to Federal estate taxes (depending on the size of your estate).

An irrevocable life insurance trust (ILIT) can be set up to be the owner and beneficiary of a new policy. The use of this type of trust has been widely regarded as an effective means for keeping life insurance policies from the taxable estate of the insured. When properly drafted, this trust can eliminate the death benefit proceeds not only from your gross estate, but also from the gross estate of the trust’s beneficiary.

If you plan to use an existing policy, you must live for more than three years following the transfer to the ILIT. Otherwise, the policy proceeds will be included in your taxable estate. Also, keep in mind that if the transferred policy has a cash value, a Federal gift tax may apply. For a new policy, the trust should be designated as the owner, applicant, and beneficiary.

The use of a tax reduction technique such as gift giving, can have a positive effect on the reduction of the size of your estate. However, as with all tax planning matters, a qualified professional should be consulted to help ensure planning decisions are consistent with your overall goals and objectives.


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