Gifts

Giving gifts to family and charity while you are still alive can benefit both the heirs and your estate. Giving gifts will you are still alive allows you to reduce your taxable estate and provide advance help to your beneficiaries. There are two easy ways to give gifts without incurring the gift tax:

  • You may pay an unlimited amount in medical or educational expenses for another person, if you give the money directly to the institutions where the expenses were incurred.
  • You may give up to $14,000 a year in cash or assets to as many people as you like.

Anytime you give more than $14,000 annually to any one person you must file a gift-tax return and the excess amount will be applied toward your unified lifetime gift and estate tax exclusion of $5.25 million.

If at any point your gifts exceed that exclusion, you will have to pay gift tax on the excess amount. The top tax rate on gifts and estates is 40% in 2013.

Keep in mind, too, that gifts you give that exceed the lifetime exclusion will reduce the amount of money you may leave to your heirs free of federal estate taxes. For example, if you give away $100,000 in taxable gifts, your estate-tax exemption will be reduced by $100,000.

A 529 college savings plan is a good investment for a young beneficiary and contributions are treated as gifts. You may gift as much as $70,000 to the account per year (or $140,000 with your spouse), although the contribution will be treated as if it were being made in $14,000 installments over five years. Which means you must wait five years before adding more money tax-free.

Charitable donations are yet another way to reduce your estate. For example, you may invest your money in a charitable gift fund or community foundation. The interest on these investments will go directly to the charities you designate on a yearly basis, thus creating an ongoing donation in your name. Many charities have already established investment fund to which you can contribute directly, thus helping the charities create an ongoing stream of income.

Last but not least, you also can set up what’s known as a charitable lead trust, from which a charity receives the income and your heirs the principal; or a charitable remainder trust, in which your heirs get the income and the charity gets the principal

Making large gifts can be complicated and the tax laws change all the time. That’s why it is important to include a knowledgeable estate planning attorney in the mix to help you avoid big tax bills. Poulos Law Firm stands ready to help you create each step of your estate plan.