Although the primary goal of your estate plan will likely be to provide a roadmap for the division of your estate assets upon your death, you will likely choose to include additional goals in your estate plan as well, such as tax avoidance. If you are fortunate enough to have built up a modest to large estate you must be mindful of federal gift and estate taxes when creating your estate plan. Numerous estate planning tools and strategies may be used to help minimize, or even avoid altogether, gift and estate taxes. One commonly used strategy is to use the annual gift tax exclusion.
When you die, your estate will have to go through the legal process known as probate. During probate your estate assets will be located and valued, in part to determine if your estate owes gift and estate taxes. The cumulative value of all assets owned by you at the time of your death combined with the value of all lifetime gifts is potentially subject to gift and estate taxes at the rate of 40 percent. Every taxpayer, however, is entitled to exempt assets valued at up to the lifetime exemption limit. The lifetime exemption limit was permanently set in the American Taxpayer Relief Act of 2013 at $ 5 million, adjusted annually for inflation. For 2015, the lifetime exemption limit is $5.43 million. This means your estate can exempt the value of lifetime gifts and assets owned at the time of death up to that amount. Gifts and assets that exceed the limit will incur gift and estate taxes. Utilizing the annual gift tax exclusion, however, offers a way to transfer a significant amount of wealth over the course of your lifetime tax-free.
The annual exclusion allows each taxpayer to make gifts valued at up to $14,000 to an unlimited number of beneficiaries each year. Not only are these gifts not taxed when made but they do not count toward the lifetime exemption limit either. “Gift-splitting” also allows a married couple to combine their annual exclusion and gift assets valued at up to $28,000 each year. If you have four children, for example, you and your spouse could transfer $112,000 per year tax-free. If you did that for just 15 years you could transfer $1.68 million in assets tax-free.
If you have additional questions about the annual exclusion, or about tax avoidance strategies for your estate plan, contact the experienced South Carolina estate planning attorneys at Kuhn & Kuhn Law Firm by calling 843-577-3700 to schedule your appointment.