Reduce Your Tax Liability with Estate and Gift Tax Planning

Take advantage of the following estate planning techniques to reduce your estate and in some instances your income tax burden.

Use of Gift Tax Exemptions to Reduce Estate and Gift Tax
Congress reinstated the federal estate tax for 2010 and thereafter, setting the unified federal estate and lifetime gift tax exemption amount at $5 million for 2010 through 2012. In 2012, they made the estate tax law permanent. The estate and gift tax exemption is adjusted for inflation. For 2012, the amount was adjusted to $5,120,000 and for 2013, the amount was adjusted to $5,250,000. The IRS recently announced that that the estate and gift tax exemption will increase to $5,340,000 in 2014. A person should consider making a significant gift of appreciating property in order to take advantage of the increased exemption and freeze the appreciation.

Annual Gift Tax Exclusion
The most commonly used method for tax-free giving is the annual gift tax exclusion, which allows a person to give each donee up to $14,000 each year without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Thus, if an individual makes $14,000 gifts to 10 donees, he or she may exclude $140,000 from gift tax. Married donors may double the amount of the exclusion to $28,000 per donee. The annual gift tax exemption will remain at $14,000 in 2014.

Tuition Payment Exclusion and 529 College Savings Plans
In addition to the annual gift tax exclusion, a person may make tuition payments for any individual without incurring gift tax. Though the amount that may be excluded is not limited, all payments must be made directly to a tax-exempt school at any level, for the purpose of education or training. The exclusion applies only to tuition.

Contributions to a college savings plan do not qualify for the exclusion for tuition payments, but are covered by the $14,000 annual gift tax exclusion. A contributor may be able to reduce his or her own state income taxes by funding a 529 plan with savings that would have been used for college anyway. Qualified distributions from a 529 plan may be used for a wide range of educational expenses, including tuition, fees, books, supplies, required equipment, and room and board.

Medical Payment Exclusion
A person may exclude from gift taxes all payments he or she makes directly to medical providers on behalf of another individual. These medical expenses must be of the type that would qualify for a medical tax deduction. The exclusion for medical payments also includes the payment of medical insurance premiums. Thus, paying a child or grandchild’s insurance premiums is an efficient means of making a tax-free gift that does not consume either the annual gift tax exclusions or the lifetime estate and gift tax exclusion. Further, the payor may claim an income tax deduction for a payment made for his or her spouse or dependent.

Gifts in Trust
Despite the tax savings, a person may be uneasy about making outright gifts to children or grandchildren, due to the loss of control over how they use the gift. We can address these concerns by making the gifts in trust, which allows the trust creator to determine when the beneficiaries receive the money and how it is used.

Charitable Gifts
Now is the time to review charitable giving to ensure it is accomplished in the most tax-efficient manner. Charitable giving is a form of estate planning because a gift to charity will never be subject to estate or gift tax, and provides the giver with an immediate income tax deduction.
We hope that the information in this article is useful in your gift planning for 2013 and 2014. If you wish to take advantage of any of the planning techniques that we have described, please feel free to call.

Written by Brenda Logsdon, CPA, Partner


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