GIFTING ASSETS:
Reducing Your Estate Tax Burden

Many people plan to minimize estate taxes through properly drawn estate planning documents. However, estate tax savings can often be substantially increased by lifetime transfers of assets. Let’s examine two available techniques.

The $11,000 Yearly Exclusion
Every person can give away tax-free up to $11,000 each year to as many people as he or she desires. For instance, this means that a married couple with two children and five grandchildren can make annual non-taxable gifts to their descendants of $154,000— $22,000 to each of their two children and five grandchildren. What’s more, there are no restrictions on who may be a donee—non-taxable gifts can be made to anyone.

“Needless to say, an estate can be substantially diminished and estate taxes substantially reduced by use of the $11,000 yearly exclusion.”

To take advantage of this exclusion, the donor must part with ownership of the assets and cannot have the ability to get them back (and, consequently, substantial gifting of assets should be undertaken only by those who are perfectly comfortable with the amount of assets he or she is retaining). However, it is possible for a donor to impose certain “controls” over the gifted assets.

For example, a donor making a gift to a child may want to prevent the child from spending the assets for other than educational or health needs until the child is beyond the age of 21 (or even a later age) and may want someone other than the child to make investment decisions. This can be accomplished by gifting the assets to a trust. Substantial flexibility is available and it is not necessary to make gifts outright and lose total control.

Applicable Exclusion Amount
A second estate tax reduction technique is the lifetime use of what is referred to as one’s “applicable exclusion amount.” In addition to the $11,000 yearly gift tax exclusion, every person may make gifts during one’s life totaling up to $1,000,000. (Unlimited tax-free gifts may be made to a spouse). This aggregate exclusion for gifts is known as the applicable exclusion amount. (If the applicable exclusion amount is not used during one’s lifetime, it is available at death to reduce one’s estate tax burden.)

A properly planned estate will take advantage of the applicable exclusion amount upon death; however, use of the applicable exclusion amount during lifetime can be a very effective estate planning tool for a person who can afford to part with some or all of $1,000,000. An estate tax reduction can occur because, to the extent the gifted assets grow in value between the date of the gift and the donor’s death, the growth escapes estate taxation. For example, assume that father gives $1,000,000 of real estate to his son, and years later, when father dies, the real estate is worth $2,500,000. The $1,500,000 of appreciation in the value of the real estate was not subject to gift tax and also escapes estate taxation in father’s estate.

Family Limited Partnerships
In many circumstances, contributing property to a newly-formed family limited partnership (or limited liability company) and gifting limited partner interests in that family limited partnership to children or their trusts can be an extremely effective estate tax savings technique. If properly structured, Dad and Mom can make gifts to their children at discounted values and still retain control over the use of the family assets.

The family limited partnership technique has numerous uses and should be explored any time a family may desire to begin a gifting program.

No Income Tax
Making a gift to one’s family members, either directly or in trust, does not cause the donor (or the donee) to recognize taxable income (unless the gifted property is subject to debt in excess of its income tax basis). In general, the donor’s income tax basis merely carries over to the donee.

The estate tax savings techniques described in this brochure aren’t for everybody. It generally is not advisable to “let the tail wag the dog”—that is, making a gift to reduce estate taxes when one is not comfortable parting with the assets is not regarded as good planning by most professionals. After all, most people do not want to ask someone, even a child, to return a gift. However, if one is comfortable parting with some of his or her assets, there can be estate tax advantages combined with the pleasure of making a lifetime gift.

Act Now!
Levun, Goodman & Cohen, LLP can provide you with more information about gift programs and how they should be structured or you can consult your legal advisor.