Estate tax planning as part of an overall estate plan has been a hot-button issue lately for many families who are concerned that the federal estate tax exemption will be reduced from $5 million to $1 million as it’s scheduled to do on January 1st, 2013. That means that the federal and Massachusetts estate tax thresholds will both be at $1 million, leaving families with assets above that mark doubly exposed to this fifty percent estate tax. The worst part? These taxes are not just on the amount above $1 million, but on the whole estate.
Naturally, many families want to find out how they can avoid this crushing tax, and in fact there are perfectly legal ways to do so. One strategy is to involve gifting as part of your estate plan. Each person has the ability to give up to $13,000 each year to any other person without incurring a gift tax. That means that a married couple could give away up to $26,000 (each giving $13,000) to each of their loved ones each year without a tax penalty.
By gifting assets to your loved ones you are reducing the value of your estate for estate tax purposes. A couple with a $1.2 million estate, for example, could easily give away $200,000 over several years, thereby taking their estate’s value under the $1 million threshold and avoiding estate taxes completely. Such a strategy should not be done in a vacuum, however, as each gift reduces your total estate tax exemption and must therefore be carefully coordinated with the rest of your estate plan. Failure to do so could mean failing to achieve you tax reduction goals.
The downside of this strategy is that you must give up control over your money while you are still alive. One way to keep a measure of control over your gifts is to create a special irrevocable trust that can hold those gifts for your heirs until you pass away. This allows you to change your beneficiaries should one pass away or your relationships change over the years. It can also help ensure that gifts to young beneficiaries are not squandered by involving the oversight of a trustee and can protect the gifts from creditors of your beneficiaries.
Whether or not you want to gift your money to others is a personal decision, but it is one effective way of reducing your estate tax exposure and ensuring that your money does not get taken by the government when you die. If setting up a gifting strategy as part of your estate plan is something that interests you, contact the heritage Law Center for a free consultation.