Many people plan to minimize estate taxes through properly drawn estate planning documents. However, estate tax savings can often be substantially increased by lifetime transfers of assets. Let’s examine two available techniques.
The $12,000 Yearly Exclusion
“Needless to say, an estate can be substantially diminished and estate taxes substantially reduced by use of the $12,000 yearly exclusion.”
To make a gift, the donor must completely part with ownership of the assets and the ability to get them back (consequently, substantial gifting of assets should be undertaken only by those who are perfectly comfortable with the amount of assets he or she is retaining). However, it is possible for a donor to impose certain “controls” over the donee’s ability to enjoy the gifted assets.
For example, a donor making a gift to a child may want to prevent the child from spending the assets for other than educational or health needs until the child is age of 21 (or even older) and may want someone other than the child to make investment decisions. This can be accomplished by gifting the assets to a trust or to a custodial account established under the Uniform Transfers to Minors Act. In either scenario, it is not necessary to make outright gifts and lose total control.
Applicable Exclusion Amount
A properly planned estate will take advantage of the applicable exclusion amount upon death; however, use of the applicable exclusion amount during lifetime can be an effective estate planning tool for a person who can afford to permanently part with some or all of $1,000,000. Because growth in the value of the gifted assets between the date of the gift and the donor’s death escapes both gift and estate taxation, the overall estate tax bill is reduced. For example, assume that father gives $1,000,000 of real estate to his son, and years later, when father dies, the real estate is worth $2,500,000. The $1,500,000 of appreciation in the value of the real estate was not subject to gift tax and also escapes estate taxation in father’s estate.
Family Limited Partnerships
The family limited partnership technique has numerous uses and should be explored any time a family desires to begin a gifting program.
No Income Tax
The estate tax savings techniques described in this brochure aren’t for everybody. It generally is not advisable to “let the tail wag the dog”—that is, making a gift to reduce estate taxes when one is not comfortable parting with the assets is not regarded as good planning by most professionals. After all, most people do not want to ask someone, even a child, to return a gift. However, if one is comfortable parting with some of his or her assets, there can be estate tax advantages combined with the pleasure of making a lifetime gift.
As required by United States Treasury Regulations and IRS Circular 230, you are advised that this message and any documents attached hereto (unless otherwise expressly stated in such document) are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws.
The materials contained herein have been prepared to provide information relating to the covered subject matter. The authors are not rendering legal, accounting, tax or other professional advice. If such advice is required, a professional advisor should be engaged.
© 2008 Levun, Goodman & Cohen, LLP