Why Giving Large Gifts to Heirs Will Not Reduce Your Estate Tax
It sounds perfectly logical. Your estate is large enough to trigger the federal estate tax, which will cost your heirs 40 percent of your estate’s wealth when you die. So, why not just give everything away before you die, so there is no estate to tax? In fact, this is such a logical means to evade the law that the federal government has already thought of it and has come up with its own solution, called the gift tax.
Under federal law, you are allowed to give individuals, such as your children, gifts up to a certain value tax free. The value of the gift can be doubled if you and your spouse give the gift jointly. But after you exceed the threshold value, known as the annual exclusion, you must pay the federal gift tax. If you have several children and you begin giving sums away very early, you might be able to give away enough wealth without triggering either the gift tax or the estate tax. And there are certain gifts that do not trigger either tax, such as:
- Tuition or medical expenses you pay directly to a provider for someone
- Gifts to your spouse
- Gifts to a political organization
- Gifts to charities
However, there are more reliable ways to avoid gift and estate taxes. When you set up a trust to hold your assets, you are not obligated to pay a gift tax, and the value of those holdings is not counted for estate tax purposes. If you transfer enough of your wealth into one or more trusts, you could get the value of your taxable estate below the qualifying amount.
If you are concerned that the size of your estate might trigger estate taxes, or if you have questions about the application of the gift tax to any of your planned transactions, speak to an experienced estate planning attorney at the Charles Law Offices.