As a result of the passage of the new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 there are new estate tax parameters in place. The estate tax was repealed for 2010, but in 2009 the exclusion was $3.5 million and the maximum rate of the tax was 45%. In what was considered to be a victory for those who decry this federal death levy the new law mandates a $5 million exclusion and a 35% maximum rate of taxation.
This is great if your estate is valued at less than $5 million, but if your estate is worth more than that you need to look for ways to gain tax efficiency. Depending on the anatomy of your resources there are a number of different estate planning vehicles that can be utilized to this end. There is however one very simple and efficient way to reduce the taxable value of your estate regardless of the overall nature of your assets: the practice of tax-free gift giving.
It would be nice if you could simply give unlimited gifts while you’re still alive in an effort to avoid the estate tax but the gift tax makes this impossible. The gift and the estate tax are unified so there is a lifetime $5 million gift tax exemption, but it is unified with the estate tax exclusion. So for instance, if you gave a $1 million tax-free gift to each of your two children you would only have $3 million of your unified exclusion left to apply to your estate.
The good news is that there are some gift tax exemptions that can be utilized that do not impact the lifetime exclusion. One of these is the annual gift tax exemption that allows each person to give gifts totaling as much as $13,000 each to an unlimited number of recipients free of the gift tax. If you plan ahead you can give these gifts over a number of years to multiple people, and this can go a long way toward reducing the value of your estate for estate tax purposes.