Systematic gifting is a simple way to transfer assets to your heirs, reduce your estate, and reduce your estate taxes.
The simplest way to avoid estate taxes at death is to give assets away during your lifetime. In order to prevent people from giving away entire estates and thereby avoiding estate tax entirely, gift taxes were added to the tax code. Fortunately, gift taxes do not apply to all gifts.
The Annual Exclusion allows all citizens to give up to $14,000 per year to any number of recipients (spouses can receive an unlimited value of gifts) without gift taxation. Any gifts over $14,000 to any one person in any year are taxable to the donor. A married couple can give up to $28,000 per year to any number of recipients.
Over time, the estate tax savings from a systematic gifting strategy can be tremendous.
The Prescotts, both age 60, are married, have 3 children and 5 grandchildren. They have a $15 million estate, and have no retirement or living expense worries. They know they face a potentially large estate tax bill upon their second death. Making annual exclusion gifts to just their 8 immediate heirs, the Prescotts can make total annual tax-free gifts of $224,000. If both live 20 years, they could remove over $4 million from their estate as well as any future growth on the gifted assets. This provides a potential estate tax savings of $1.6 million assuming a 40% estate tax rate.
Often, gifts of cash are used to purchase life insurance inside special trusts called Irrevocable Life Insurance Trusts/Crummey Trust to help offset any remaining estate taxes. If the gifts are not to be used to purchase insurance, it is wise to gift assets that are expected to appreciate rapidly so as to remove the asset as well as its future growth from the estate.