One simple and straightforward way that you can reduce the overall value of your estate for estate tax purposes is by giving gifts to your loved ones while you are still alive. Unfortunately, the powers that be are well aware of this simple logic so there is a gift tax in place and it carries the same 35% rate as the estate tax.
There is a lifetime gift tax exemption of $5 million, but it is unified with the estate tax. So as an example, if you were to give $3 million in gifts throughout your life utilizing this exemption only the first $2 million of your estate would be exempt as it was being passed along to your heirs. However, there are some additional gift tax exemptions that can be utilized that do not impact this $5 million unified gift/estate tax exclusion.
One of them is the $13,000 per person annual gift tax exemption. You can give as much as $13,000 to as many people as you would like to each year free of the gift tax. It important to understand that this is a per-person exemption, so if you are married you and your spouse could combine your respective exemptions and give as much as $26,000 per year to an unlimited number of gift recipients without incurring any gift tax liability. To take this a step further, if you wanted to reduce the overall value of your estate in an effort to gain estate tax efficiency you and your spouse could each give $26,000 to both your child and his or her spouse as individuals and a total of $52,000 per year could be transferred.
If you were to plan ahead over a significant number of years and take full advantage of this exemption you could in essence give your loved ones a significant portion of their inheritances while you are still alive to watch them enjoy the resources and gain a tax benefit while doing so.
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