Taxable Gifts: Pay Less to Uncle Sam

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Most people want to minimize their current tax liability and defer the payment of taxes, thinking that the more taxes paid today, the less money they will have for tomorrow. Yet under our estate and gift tax system, deferring taxes, may not be the best strategy if the goal is to minimize what you give to the government and maximize what your heirs will ultimately receive.

By making lifetime taxable gifts in excess of the unified credit amount of $600,000, you can provide even more for your heirs. One reason is that any post-gift income or future appreciation related to the property transferred will not be subject to estate tax in the donor's estate. Another reason is that if the donor lives at least three years from the date of the gift, any gift tax paid is also removed from the estate, further reducing the amount subject to estate taxes. Since the Federal estate tax climbs to an imposing marginal rate of 55% on taxable estates over $3 million, making taxable gifts may significantly increase the amount left for your beneficiaries.

Make the Most of Tax-Free Gifts Before making taxable gifts, there are certain planning opportunities that should be fully exploited. One of the biggest tax breaks available is giving up to $10,000 a year to any number of individuals without the transfers being subject to gift tax-as long as the gifts are considered present interests. If the taxpayer's spouse joins in making the gifts, the break doubles to $20,000 per donee. So, if a married couple has a child who is married with three children, the couple could give away $100,000 a year ($20,000 per donee). Over 10 years, that would remove $1 million from the couple's estate. In addition, any post-gift income and appreciation related to the gifted assets would be removed from the estate and excluded from estate taxes.

An estate can be further reduced by paying the educational, or medical expenses of any individual. These gifts are not subject to the $10,000/$20,000 annual exclusion limitation, as long as the payments are made directly to the organization providing the service.

Gift and estate taxes are structured under one system. So, in addition to gifts covered by the annual exclusion, an individual can give away up to $600,000 either during his or her lifetime or at death without triggering Federal gift or estate tax.

The Advantages of Making Gifts in Excess of $600,000

By making gifts in excess of $600,000 during your lifetime, heirs can end up with even greater amounts after all taxes have been paid. …