If you are considering embarking on estate planning or modifying an existing estate plan, one of your objectives necessarily is to minimize the amount of paid in estate and inheritance taxes. You also likely want to make the formal probate process following your death as simple as possible or eliminate it all together. There are a number of strategies you can employ while you are alive to legally minimize or eliminate an estate or inheritance tax liability in the future as well as to make the probate process itself as simple as possible after you die. These strategies include establishing a trust but also taking full advantage of conveying tax exempt gifts while you are living.
Annual Tax Exempt Gift Basics
What many people do not realize is that gifts can be subject to a federal tax. At the present time, the base tax rate for a gift is 40 percent of value of a gift given. The giver is responsible for paying the tax. The reality is that people in the United States rarely are forced to pay a gift tax because of some generous exemptions that exist in relation to this means of transferring assets to other people. Because of these generous exemptions, gift giving can be a useful means of avoiding estate and inheritance taxes after you die.
The most essential exemption you can take advantage of when it comes to gift giving is the annual exclusion amount. With this exclusion, you have the ability to give up to $15,000 to anyone and not face a gift tax issue. For example, if you have four children, you can convey a total of $60,000 to your offspring with no tax consequences today or when you pass away. Moreover, if you’re married, your spouse can follow suit and gift the same amount of money annually. Thus, in this hypothetical, $120,000 can be passed to children with no tax issue whatsoever.
Lifetime Gift and Estate Tax Exemption
In addition to the $15,000 per person gifted annual exclusion, there is another exemption that can be utilized to pass property during your life without a tax consequence. During your life, and following your death, you can avoid gift and estate taxes for gifts and bequests above and beyond this $15,000 per person annual exclusion amount. In 2019, the grand total of what can be conveyed in these manners is $11.4 million. The reality is that almost no one fully takes advantage of the annual exclusion opportunities and the additional $11.4 million amount. In other words, virtually no one ends up on a position in which they find themselves paying gift taxes.
Other Gifting Strategies
Beyond making direct gifts to people during the course of your lifetime as a means to avoid tax and probate expenses, you can make other types of gifts as well. For example, while living you can make gifts to charities and face no gift tax consequence. If you donate to a 501 (c) (3) nonprofit, you can also receive a tax deduction when you file your annual income tax.
Another type of gift that you can make during your lifetime that avoids a gift tax consequence involves paying another person’s medical bills. Federal law permits you the ability to pay someone else’s medical bills without any tax consequence. Thus, if you have a child or someone else in your life that has amassed medical bills and needs help addressing these obligations, you can make a gift of paying these costs without any gift tax consequence.
In regard to gifting money to pay medical bills, the money must be paid directly to the healthcare provider and not the individual in order to enjoy no tax consequence whatsoever. There exists absolutely no limit on the amount of money that you can spend in this manner on behalf of one person and not have any tax consequence whatsoever.
Overall Estate Planning Strategy
The availability of the gift tax exclusion every year and the additional lifetime exemption can be a valuable estate planning tool. If you’re in a financial position in which you can gift away some of your money during life, the beneficiaries of such gifting are likely to be highly grateful to you. In other words, you are able to witness the benefits of your generosity whilst living.
Beyond gifting, you can consider establishing a trust to address assets beyond those that you are comfortable gifting away while living. In the final analysis, a seasoned estate planning attorney can assist you in developing a comprehensive plan that optimizes the benefits to your heirs and even yourself.
The typical estate planning attorney will schedule an initial consultation with you to consider your needs, goals, and objectives. As a matter of common practice, an estate planning lawyer charges no fee for this type of meeting with a prospective client.