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FEDERAL GIFT TAXES CAN REDUCE AN ESTATE’S TAX LIABILITIES: PART 1 OF 3

Tax Free Gifts

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Federal gift tax laws play an integral role in reducing an estate’s income tax liabilities. As a taxpayer, making lifetime gifts can reduce your estate’s gross tax liabilities since these gifts are not included as part of your gross estate at your death in most cases. According to the federal Internal Revenue Code, a gift is one in which real or personal property, cash or any other type of property is given away without consideration or payment in return. A lifetime gift is one in which you retain no other control and is complete at the time of your death.

Each taxpayer is able to exclude up to $13,000 in annual gift taxes. This means that neither the gift recipient nor the gift donor pays federal income taxes for gifts of up to $13,000. The annual gift exclusion applies to gifts of up to $13,000 made to each done. This means that if you have three children, you can give each child a cash or property gift of up to $13,000 per year without paying federal income taxes. As you can see, making a lifetime gift may make sense since it will reduce your federal estate taxes, which is important in estate planning. Your beneficiaries will not have to pay federal income taxes on property given away while you were alive. By giving your children money now, you can help them save money on estate income taxes after your death.

This blog is part 1 of 3 on how Federal Gift Taxes cab reduce an estate’s tax liability. Tune in to our blog tomorrow to read Part 2.

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We have highlighted the inheritance planning strategy of gift giving previously, but there is an exemption that is often overlooked that we would like to look at today. To provide some context the purpose of giving gifts from an estate planning perspective is to reduce the value of your estate in an effort to limit or eliminate your heirs’ estate tax exposure. On a personal level, when you give those who would be receiving inheritances from the estate gifts while you are still alive you get to enjoy the exchange and it is a totally positive experience for all concerned.

Of course there is a gift tax that comes in at a rate that mirrors the estate tax, but there are exemptions that you can utilize. The one we want to take a look at here is the tax-free medical gift. Each individual can pay the medical expenses of an unlimited number of people without incurring any gift tax responsibility. This includes necessary health care treatments and not elective measures like cosmetic surgery. It should be noted that the high cost of nursing homes and assisted living facilities are a cause for concern in elder laws circles, and these can be mitigated through tax-free medical gift giving depending on the circumstances.

Paying the bills when someone that you care about becomes ill is one way to take advantage of this gift tax exemption, but you can also pay for the health insurance of as many people as you want to regardless of the total cost. This includes some forms of long-term care insurance as well, so you can really provide your loved ones with quite a safety net if you choose to give them medical gifts. Aside from the insurance and perhaps paying for the long-term care of a loved one it is hard to have a hard and fast health care gift plan in place, but it is something to keep in mind should you find that a family member is in need of medical assistance.