We are all aware of the fact that grandparents and grandchildren often share a very special relationship. When you are planning your estate, making provisions for your grandchildren may well be a priority. Of course you are going to want to do as much as possible for them, so the last thing that you would want to see is the estate tax lopping off a large portion of your legacy, resources that could have otherwise gone to your grandchildren and the rest of the people in your inheritance list.
If the value of your estate exceeds the exclusion threshold, it is subject to the estate tax. Right now that threshold stands at $5 million, and the rate of the tax is 35%. But, at the end of next year the exclusion is scheduled to go down to just $1 million and the top rate of the tax is going up to 55% (unless there are new laws passed between now and then). So, any assets that you have that exceed $1 million will be shaved down by almost half, and no, that in not an error.
What do you do to combat this asset erosion so that you can take care of your grandchildren? One option would be to give tax-free gifts in an effort to reduce the value of your estate, making your grandchildren happy while you are still around to see the smiles cross their faces. Each year you are allowed to give gifts of up to $13,000 to an unlimited number of recipients free of the gift tax.
Since this is a per-person exemption, if you are married you and your spouse could give a total of $26,000 to each grandchild every year. If you plan ahead, you can see how this would be a very effective way to transfer assets in a tax-free manner while reducing the taxable value of your estate in the process.