For taxpayers who have a moderate to large estate, a thorough estate plan should include tools that minimize the exposure to estate and gift taxes. While the recently enacted American Taxpayer Relief Act of 2012 made the temporary lifetime exemption limit of $5 million (adjusted each year for inflation) permanent, taxpayer’s should not depend solely on that to reduce their gift tax exposure. The annual gift tax exclusion is an excellent way to further decrease your gift and estate taxes.
Each year, a taxpayer can gift up to the annual gift tax exclusion amount (set at $14,000 for 2013) to as many beneficiaries as he or she wants. Furthermore, you may combine your exclusion with that of your spouse to gift assets worth $28,000. For those with a large estate, the annual gift tax exclusion may seem a drop in the bucket; however, it can easily add up over time.
Let’s say that you and your spouse have an estate worth $20 million. After exempting $10.5 million for your combined lifetime exemption amounts, you still have $9.5 million subject to estate and gift taxes. If you are taxed at the maximum rate of 40 percent that means your beneficiaries will lose $3.8 million to taxes. If you have four children and six grandchildren, you could make gifts to each of them for ten years and you would be able to gift an additional $2.8 million free from gift taxes. This lowers your gift tax bill by $1.12 million—money that could go to your beneficiaries instead of Uncle Sam.
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