Simple Estate Planning: Lifetime Gift Giving

One of the simplest methods of estate planning is lifetime gifting of money or property.  A gift is a transfer of money or property in exchange for nothing or for less than full value.  

Reduce Estate.  Lifetime gifts are a great way to reduce a taxable estate, thus getting money out of your estate while at the same time benefiting those people receiving the gifts.  Under the current estate tax legislation, fewer and fewer estates will be subject to federal estate taxes as Congress has raised the estate tax exemption amount (currently at $5 million per person).  However, Minnesota still has an estate tax that kicks in for estates greater than $1 million.  Taking into account assets such as real estate, life insurance policies, and retirement accounts, it is not difficult to reach this $1 million threshold.  For estates near the $1 million level, lifetime gifts are a great tool to get your estate under the threshold to avoid paying any Minnesota estate tax, thus preserving more eventual money for your beneficiaries.  Note that there are certain rules which pull gifts back into your estate for estate tax purposes if the gifts are made within the three years prior to your death. So, you have to survive for three years after making a gift for it to truly be out of your estate.  

Gift Tax and the Annual Exclusion.  There is currently no Minnesota gift tax.  However, gifts over a certain amount (currently $13,000) are subject to a federal gift tax.  But there is a gift tax exemption of $5 million, meaning that you would have to make over $5 million worth of taxable gifts before you would owe any gift tax (for 2011 and 2012).

A taxable gift is basically a gift in excess of $13,000.  The $13,000 limit is known as the "annual exclusion."  You can give up to this amount each year to a person without making a taxable gift.  Also, you can give up to this amount to any number of people each year.  Spouses can combine their annual exclusions to give a single person up to $26,000 each year before a gift tax kicks in.  Gifts between spouses or to charities do not incur a gift tax, no matter the gift amount.   

In addition to the annual exclusion amount, you can make certain payments towards someone's medical and education expenses, as long as the payments are made directly to the health or education institutions.  These payments do not count against the $13,000 annual exclusion, thus providing another opportunity to reduce your estate while providing for someone you care for.  

Naturally, in order to take advantage of lifetime gifting, you first must have enough property to look after your own needs.  But if you are in a position to make gifts, they can be a great estate planning tool that also greatly benefits those people receiving the gifts.  Furthermore, you are able to see your beneficiaries' enjoyment of the property while you are alive, as opposed to after your death - perhaps a more personally fulfilling way of leaving an inheritance.