Don’t Forget How Much the Annual Exclusion Gift Can Save You
Tax planning for your estate can quickly become complicated. There are many strategies available, which can seem overwhelming if you’re looking for every little advantage you can get.
Paying attention and looking for new and creative ways to save money is a smart move. However, it’s important not to lose sight of tried and true methods as well. Like the annual exclusion gift.
Making an annual exclusion gift is a highly effective strategy for estate tax planning, and can help preserve as much of your estate as possible for your beneficiaries. An estate planning attorney will evaluate the specifics of your estate to determine whether an annual exclusion gift is advisable, and if so, how to get the most out of yours.
Annual Exclusion Gift Basics
Each year, you are allowed to gift up to $15,000 to each of your beneficiaries tax-free. This amount increases to $30,000 if a beneficiary is married and the couple is “splitting” the gift.
So long as the amount does not exceed $15,000, your beneficiaries are not required to report this as income to the IRS.
Making an annual exclusion gift can significantly decrease the estate transfer tax due upon transfer of your estate.
Depending on the size of your estate, it could be beneficial to routinely make these kinds of annual gifts. Again, your Florida estate planning attorney can determine what strategy would be most beneficial for your circumstances.
Gifting to Trusts
Many clients gift assets to their beneficiaries in trusts rather than outright to provide estate tax benefits and creditor protection.
Generally, gifts made to trusts are not eligible for the annual exclusion. However, if the trust’s beneficiaries have the unilateral right to withdraw a portion of the trust’s assets each year, gifts made to the trust are eligible for the annual tax exclusion.
One concern many people have when gifting assets early is that younger recipients might not yet be responsible enough to manage such a large amount of money. In this case, you could grant unilateral rights to older beneficiaries, such as children, and place stipulations on younger beneficiaries, such as grandchildren.
For younger beneficiaries, stipulations can help ensure that the funds are not misused. For example, you could stipulate that:
- The beneficiary can only access income generated by the assets, or
- The beneficiary can only access the funds after graduating college.
If applicable, 529 plans can be incorporated into your estate tax planning to further extend the power of annual exclusion gifts.
A 529 plan is a tax-advantaged savings plan designed to pay for qualified educational expenses. These include educational expenses for K-12 education, post-secondary education, and apprenticeships. 529 plans are tax-deferred, and withdrawals for qualified educational expenses are tax-free.
You can gift up to five years’ worth of annual exclusion gifts to “frontload” a 529 plan and use no transfer tax exemption.
For example, you could gift up to $75,000 in one year for a grandchild’s 529 plan, and treat the entire amount as annual exclusion gifts for that year and the subsequent four years. If you are married, your spouse can do the same, for a total of up to $150,000.
Interested in learning more? Reach out to learn how you can use annual exclusion and other estate tax planning strategies to disperse as much of your assets as possible to your beneficiaries.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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