Hyden, Miron & Foster, PLLC Law Blog

Monday, May 16, 2016

Estate Tax Planning: Year-End Gift Giving

What is a taxable gift for estate planning purposes?

Many individuals can take advantage of year-end gift giving as a means of transferring wealth to their beneficiaries while minimizing the potential estate tax that might be due upon their death. A gift is any transfer for which nothing, or less than fair market value, is received in return; and a variety of gifts are not taxable.  Currently, an estate that has a value up to $5.45 million is exempt from Federal estate taxes ($10.9 million for married couples), and there is no Arkansas estate tax.

Annual Gift Tax Exclusion

While many will not acquire assets greater than the federal exemption amount, high-net worth individuals can make annual gifts to loved ones during their lifetimes to reduce the overall value of the estate so that is does not exceed the current exemption amount. In some cases, however, gifts made during an individual's lifetime may be subject to a gift tax (equal to the estate tax).

The current annual gift tax exclusion for individuals is $14,000, and for married couples, $28,000 which expires on December 31 each year. This means that it is possible to transfer larger gifts by making a payment up to the exclusion amount in December, and another in the following January, and qualify for the gift tax exclusion in both years. Making gifts above the exclusion amount means not only that a tax will be owed, but that the estate tax exemption will also be reduced.

Non-taxable Gifts

A variety other gifts are not taxable such as tuition that is paid directly to a school or contributions made to a §529 College Savings Plan (these contributions may also be eligible for a state tax deduction). In addition a beneficiary's medical expenses that are paid directly to a healthcare provider are not taxable, provided that the expenses qualify for an income tax deduction. Finally, gifts to a spouse who is a U.S. citizen, gifts to political organizations and gifts to certain charities are also exempt from the annual gift tax. If a gift is taxable, however, the current gift estate tax rate is 40% which must be paid by the individual who makes the gift.

In the final analysis, high net-worth individuals with large estates can reduce the size of their estate by making annual gifts during their lifetime. However, you are well advised to consult a team of professionals, including a financial advisor, accountant, and a estate planning attorney, in order to take advantage of year-end gift giving strategies.

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