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Does a Gift-Giving Plan Reduce the Amount of Taxes Owed?

by Jeffrey Asher, Estate Planning Expert
February 25, 2014

Question: I have recently retired and am in the process of estate planning for me and my family. Someone suggested starting a gift-giving plan to reduce the amount of taxes I owe. How does this work?

Answer: A “gift-giving plan” is intended to reduce your estate by virtue of the fact that you are giving away assets of your estate that would otherwise be subject to the estate tax.  The federal government currently taxes estates of US citizens that are over a person’s lifetime/at death available gift tax/estate tax exemption. Currently, a US citizen’s estate tax/gift tax exemption is equal to $5,340,000. This means that a US citizen can give away (during their lifetime) or die with (in 2014) assets up to $5,340,000 and not pay federal gift taxes or estate taxes. States have their own rules when it comes to gift taxes and taxable estates. For example, NYS does not have a gift tax, but taxes estates that are over $1,000,000.

The federal government also allows each US Citizen an “annual exclusion” against federal gift taxes.  In 2014, the “annual exclusion” is $14,000.  This means that a person can gift to any number of people $14,000 per year.  So, if a father wants to make gifts to his 3 children, he could make “annual exclusion” gifts of $14,000 to each child, for a total of $42,000 [$14,000 x 3 = $42,000].  There would be no gift tax because of the annual exclusion.  If this were a married couple and they wanted to make gifts to their 3 children, then each parent could make a $14,000 “annual exclusion” gift to each child, for a total of $84,000 [$14,000 x = $42,000 x 2 = $84,000].  In fact, there does not even need to be any familial relationship.  So, anyone can give to anyone else no more than $14,000 per year as “annual exclusion” gifts, which are not subject to the federal gift tax.

 So, by giving away a valuable asset during life (i.e., a gift-giving plan), three things are intended:

1. The asset given away is no longer part of the donor’s estate, thus estate taxes are avoided on the value of the asset given away.

2. If the asset given away is less than $14,000, then any gift tax will be avoided by virtue of the federal “annual exclusion”.

3. If the asset given away is more than $14,000, then any gift tax will be avoided – if the value of the asset given away is less than $5,340,000 – by virtue of the federal government’s gift tax/estate tax exemption, subject to the donor’s available gift tax/estate tax exemption.

4. State gift taxes and/or state estate taxes may be avoided, depending on whether or not, and to what extent, a state has a gift tax and/or an estate tax.

Please understand, however, that the above discussion describes the general understanding behind a gift-giving plan.  However, the proper implementation of a gift-giving plan depends on the donor’s available gift tax/estate tax exemption, the state in which the donor lives, the type of asset being gifted, the impact on the donor’s liquidity and/or budgetary needs if he/she no longer owns the asset or no longer receives the benefit of its income, as well as the ability of the donee to accept the gift without risk of forfeiture because of creditors or divorce or disqualification for education, health, or other benefits/entitlements.

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Jeffrey Asher is a prominent Trusts & Estates and Elder Law attorney in Westchester County and New York City. Mr. Asher concentrates primarily in the areas of Estate Planning, Probate and Estate Administration, Elder Law, Medicaid Planning, and Special Needs Planning. Mr. Asher provides comprehensive legal services, tailored to meet your specific needs.

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