While there are very sophisticated estate planning techniques used to reduce one’s taxable estate, while one is living, there are also some simple, inexpensive ways to do so as well. Yes, attorneys can establish all types of trusts for clients, in order to shelter assets from estate taxes, and those trusts are certainly useful, but things don’t have to be that complicated. Here are just a few easy ways to accomplish your goals.
1. Annual Gifting: Each person can give the sum of $14,000 per individual each year, without having to report the gift on a gift tax return, and without it reducing the donor’s unified credit for estate taxes. A married couple, therefore, can give each of their children $28,000 per year, if they do so as a couple or if they each make the gift separately While that does not seem to be significant, gifting every year can have a significant impact on the estate tax issue. Of course, one can gift to grandchildren, strangers, etc., but be careful not to gift to minor children, as that can create many complications. The annual exemption amount of $14,000 is supposed to be indexed to inflation, so it may increase from time to time.
2. Educational expenses: Each person can pay the tuition of any other person, in unlimited amounts, without adverse tax consequences, as long as the payment is made directly to the institution.
3. Medical expenses. Similar to education, one can pay the medical expenses of anyone, without adverse gift or estate tax consequences, provided the payment is made directly to the provider of service.
4. College plans. Contributions to 529 college plans qualify for the annual gift tax exclusion (of $14,000 per year) and one can contribute 5 years of contributions in advance. Therefore, one can gift $70,000 per person to a 529 college plan without adverse tax consequences, except that one can not then gift the beneficiary of the plan, directly or indirectly, for 5 years, without incurring a gift tax problem. Being able to advance the contribution for 5 years has the effect of removing future appreciation in value from one’s estate.
5. Charitable donations. Contributions to qualified charities are an easy way to reduce one’s estate, as they are not subject to estate tax. Similarly, leaving monies to a charity at the time of one’s death reduces the size of one’s taxable estate.
As can be seen, estate planning does not have to be complicated. It does make sense, however, to consult with a professional experienced in this field, to make sure that the actions you are taking make sense.
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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.