Taking Advantage of Annual Gifting and Your Lifetime Exclusion

Not very many people end up paying estate taxes when they die. You need an estate of at least several million dollars. That amount is referred to as your Lifetime Exclusion. It is getting bigger each year, so less and less people have to worry about this rather large tax. For those of you who do fall into this group, there are ways to minimize the estate tax.

Annual gifting is a technique whereby the taxpayer gifts to each of his children $14,000 each year. His spouse is also allowed to give $14,000 to each child. They both can come along and give another $14,000 each to the spouse of their child. That is a total of $56,000 to each of the siblings. There is no tax on this. There are no tax forms to fill out. The best part of this strategy is that it actually reduces the estate by more than $56,000 because it also takes away any future appreciation of that cash, or stock, as the case may be.

Using up the Lifetime Exclusion is more complicated. This involves filing a gift tax return to report the gift. There is no tax, but you need to show IRS that you have used up part of your Exclusion. Some people are hesitant to use this up, but in reality you have nothing to lose. You either use it up now, or use it up later. My philosophy is that it is worth more now because you are also gifting away the future appreciation. A gift of $1 million today reduces your estate by $1.5 million or even $2 million, depending on how much longer you live.

I have only touched the surface in this discussion. There are much more complicated methods available for reducing estate taxes.