For a taxpayer who is fortunate enough to have amassed a moderate to large estate one goal of estate planning should be to limit the estates exposure to gift and estate taxes. In the state of Illinois, there are numerous strategies that can be incorporated into a comprehensive estate plan to achieve this goal. One of those strategies is to utilize the annual gift tax exclusion.
When you die all of your estate assets, meaning anything owned by you at the time of death, must be inventoried and valued as of the date of death. The total value of your estate is then potentially subject to federal gift and estate taxes. Some states also have a similar tax that could be levied on your estate when you die. Planning ahead is the key to limiting, or avoiding altogether, your estates exposure to federal gift and estate taxes.
Making use of the annual gift tax exclusion in Illinois is a very simple way to transfer assets tax-free prior to your death. The annual gift tax exclusion allows each taxpayer to make gifts of up to $14,000 in value to as many beneficiaries as he or she wishes each year. If you are married you may combine your gifts, referred to as “gift-splitting”, to transfer gifts valued at up to $28,000. Not only do these gifts not incur gift and estate taxes, but they are also not counted against a taxpayers lifetime exemption to gift and estate taxes. Each taxpayer is entitled to exempt up to the lifetime exemption amount, currently set at $5.25 million for 2013, before his or her estate incurs gift and estate taxes. Using the annual gift tax exclusion you can transfer a significant amount of assets and still have your entire lifetime exemption amount available at the time of your death.
To see how planning ahead and using the annual gift tax exclusion can benefit your estate plan let’s assume that you and your spouse have three adult children and five grandchildren. Using the “gift-splitting” option you and your spouse can gift up to $28,000 and assets to each of your eight children and grandchildren each year, meaning you can transfer up to $224,000 each year tax-free. If you did this for 10 years you would be able to transfer $2.24 million to your children and grandchildren without incurring gift and estate taxes and while retaining the right to use your entire lifetime exemption amount.
Talk to your estate planning attorney to see how you can incorporate the annual gift tax exclusion into your overall estate plan.
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