Money Management Newsletter
Gifts Can Reduce Estate Taxes (Estate Planning Series)
Dr. Jo Turner, Professor
Family and Consumer Economics
A properly prepared will that is updated periodically is the only way to guarantee that your property, at your death, will be distributed according to your wishes. A will by itself will not reduce estate taxes.
Several alternatives are available to help reduce estate taxes. Giving property while you are alive is one of these alternatives. The most important rule to remember when giving part of your estate is: “Do not give up income producing property or any property that may be needed for your own livelihood.” Gifts should be given to reduce the size of large estates and to benefit heirs, but not to hurt those making the gift.
Under current law (2006) an individual can give gifts of up to $12,000 in value tax free, (that is no gift taxes) each year to an individual recipient. A married couple can give up to $24,000 to each individual. If a couple, for example, had three children and wanted to give each a gift. They could jointly give each child $24,000 in any one year for a total of $72,000 without incurring gift taxes. Cash and stocks are easy to give, but land and other property can be more difficult to give away. Remember if you give property, control and title must be changed to the new owners.
Property given to your heirs now, it is available for their use. Any increase in property value will not be included in the donor’s taxable estate, assuming proper care was taken in making the property transfer. Assets that you give away keep your cost basis (what you paid for the property), so the recipients may have to pay capital gains tax when they sell the gifted property.
All gifts with the exception of the $12,000 annual exclusion per recipient are taxed from the estate of the donor. Remember, giving gifts is an estate-planning tool that requires much thought. The counsel of your estate planning attorney would be advisable before you get involved in any programs of gifts whether to minors or to others.
Another way to reduce your taxable estate is to make use of a Credit-Shelter Trust.
The unlimited marital deduction allows you to transfer all of your assets to your spouse without estate taxes. (This may or may not be the best strategy tax wise.) Then the estate in excess of the exemption ($2 million in 2006 scheduled to increase) is taxed when the last spouse dies. If the value of the total estate is in excess of the exemption there are other strategies that can be used to decrease estate taxes. One of the most popular is the “by pass trust” or “Credit-Shelter Trust.” This trust is designed to allow the first to die to take full advantage of his/her exemption that allows $2 million (2006) to pass free of federal estate taxes. The surviving spouse may have use of the income from this trust but cannot determine the final distribution because this property will not be in the surviving spouse’s estate. This simple tool can save thousands of dollars in estate taxes.
References:
Kapoor, Personal Finance 6th ed. 2001
T Garman, Personal Finance 8th ed. 2006
Estate Planning: Online learning Center
http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
