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Tax Savings with a Gifting Program

One way to help reduce the size of one's taxable estate is to give assets away—the smaller the taxable estate, the smaller the federal estate tax liability. In today's tax environment, the federal estate and gift tax rates are identical. Thus, gift-giving durng one's lifetime can be an effective estate and gift tax minimization tool.

Gift-Giving Basics

  1. The annual gift tax exclusion allows a donor to give away up to $12,000, adjusted for inflation, per calendar year, per donee, without incurring a gift tax liability. If the donor is married and his or her spouse consents to "splitting" the gift, the annual gift tax exclusion is increased to $24,000, adjusted annually for inflation, even if only one spouse actually makes the entire gift.
  2. Making gifts during one's lifetime shifts future appreciation of gifted property to the donee.
  3. Taxable income may be shifted from the high tax bracket of a donor to the lower tax bracket of a donee, age 14 or older.

What About Life Insurance Gifts?

For many individuals, life insurance can be the single largest asset in their gross estates. If this is true in your case, you may wish to consider how to shield the death benefit proceeds from federal estate tax liability. If, at your death, you own a life insurance policy, the death benefit proceeds will be included in your gross estate and could be subject to federal estate taxes (depending on the size of your estate).

An irrevocable life insurance trust (ILIT) can be set up to be the owner and beneficiary of the policy. The use of this type of trust has been widely regarded as an effective means for removing life insurance policies from the taxable estate of the insured. When properly drafted, an ILIT can eliminate the death benefit proceeds not only from your gross estate, but also from the gross estate of the trust's beneficiary.

If you plan to use an existing policy, you (the transferor) must live for more than three years following the transfer. Otherwise, the policy proceeds will be included in your taxable estate. Also, keep in mind that if the transferred policy has a cash value exceeding the annual exclusion amount, a federal gift tax may apply. For a new policy, the trustee should be designated as the owner and applicant.

An outright gift is another method of removing life insurance from your gross estate. This is accomplished by gifting all incidents of ownership in your policy to a third party, such as your child or a favorite charity. If the transferred policy's value exceeds the annual exclusion amount, federal gift tax may be incurred. Also bear in mind, as is the case with any transfer of policy ownership, the donor must live for more than three years after the transfer. If the donor dies within three years of the transfer, the proceeds of the policy will be included in the gross estate of the decedent.

The use of a tax reduction technique such as gift-giving, can have a positive effect on the size of your estate. However, as with all tax planning matters, a qualified professional should be consulted to help ensure planning decisions are consistent with your overall goals and objectives.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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