Gifting is always a key tax planning strategy to carefully consider (especially at year-end) and it looks like the estate and gift tax potentials look a little brighter next year as well. The lifetime gift and estate tax exclusion has been raised to $5.43 million for 2015. This means that next year the total amount that you could have gifted over your life or which you are able to leave at death without tax is $5.43 million, a $90,000 jump from last year’s $5.34 million exclusion. Remember, the gift and estate amounts are linked so if you gift $2 million then you only have $3.43 million to leave at death before taxes would be owed.
Another name for this amount is the basic exclusion and you can make it work to your advantage in a few different ways. If it makes sense, you can transfer that extra $90,000 into a trust for your heirs or gift it outright. But be weary before you decide to directly gift larger amounts, make sure that your beneficiaries are going to use the money responsibly and be aware of the basis transfer rules with gifting v. leaving as inheritance. Consider if the gifts would be put to better use now or later on, after your passing.
Another factor to work into your planning is the annual exclusion. The annual exclusion will remain at $14,000 in 2015, the same as last year. This rule allows you to give up to $14,000 to as many people as you wish tax free without impacting your lifetime exclusion.This amount can be transferred as assets or cold hard cash without affecting your basic lifetime exclusion limit.
It is important to take these guidelines into account, as an estate can be taxed up to 40% when left to its beneficiaries if over the thresholds. For example, you are over the exclusion amounts by $1 million and your desire was to pass that amount on to your heirs. Without proper protection, that $1 million turns into $600,000 after estate taxes. It can make quite a difference if you don’t strategically plan during your lifetime.