You must be aware of the potential for taxation when you are planning your estate. There is a federal estate tax in place, and it can significantly erode the financial legacy that you are leaving behind. At the present time, the maximum rate of the federal estate tax is 40 percent.
Everyone does not pay the estate tax because there is a federal estate tax credit or exclusion. This is the amount that you can transfer free of taxation. If you are transferring assets that exceed the amount of this exclusion, the estate tax could be applicable. In 2014, the amount of the federal estate tax exclusion is $5.34 million.
Unified Gift and Estate Tax
In addition to the federal estate tax, there is also a federal gift tax. This tax exists to prevent people from giving gifts to avoid the estate tax. The gift tax is unified with the estate tax. As a result of this unification, the $5.34 million exclusion applies to gifts that you give while you are living in combination with the value of your estate.
Now that we have provided the necessary background information, we can answer the question that serves as the title of this post. There are no particular tax advantages to be gained by using your unified lifetime exclusion to give gifts while you are living.
To provide an example, let’s say that you have $20.34 million that you want to transfer to your loved ones. You can transfer $5.34 million tax-free either while you are alive or after you pass away. If you give $5.34 million in tax-free gifts while you are living, the entirety of your $15 million estate would be exposed to the estate tax.
If you give no gifts while you are living, the same situation would exist from a tax perspective. After you pass away, the first $5.34 million could be transferred to your heirs tax-free. The remaining $15 million would potentially be subject to taxation.
Annual Gift Tax Exclusion
Utilization of the unified lifetime exclusion is not going to provide you with any tax savings. However, there is another exclusion that can be used to transfer assets free of transfer taxes.
There is a $14,000 per year, per person gift tax exclusion. You can give as much as $14,000 to any number of people within a given year without incurring any gift tax exposure.
This exclusion can be used to transfer assets tax-free while you simultaneously reduce the taxable value of your estate.
The annual gift tax exclusion can be used to incrementally fund an irrevocable trust that is designed to provide tax efficiency. You could also use the annual gift tax exclusion to distribute shares in a family limited partnership.
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