Knowledge and Insights

Most of us are familiar with the concept that we can gift a certain amount of money to another person every year without gift tax consequences and that there is a limit to lifetime gifts beyond that amount that we can give away that somehow relates to estate taxes when we die.  For 2016, those amounts are $14,000 from one person to another gift-tax free and $5.45 million in lifetime gifts or estate value upon death that is sheltered by a credit.  What many are not aware of is the variety of ways to maximize gifts while minimizing the use of the lifetime credit.

1. One of the most common exempt gifts you can make is the direct payment of medical costs.  Medical costs paid to the provider of the services are specifically excluded from the gift tax regime.  Medical costs include medical and dental insurance premiums as well as costs associated with the diagnosis, cure, mitigation, treatment or prevention of disease.  The key to this exclusion is that you must pay the insurance company or service provider directly – reimbursement to the person benefiting from the medical services does not qualify and counts toward the $14,000 annual exclusion, and amounts beyond it will utilize the lifetime gifting / estate tax credit.

2. A second exempt gift is the payment of tuition for the benefit of an individual to qualifying domestic or foreign educational organizations for education or training purposes.  A qualifying educational organization is one that normally maintains a regular faculty, curriculum, an enrolled body of students in attendance, and educational activities are regularly carried on.  This would include private elementary, middle and high schools, as well as colleges, both domestic and foreign.  The exemption is limited to tuition and does not include, books, supplies, room and board, etc.  Again, it is key to this strategy to pay the educational institution directly in order to qualify for the exemption.

3. More complex, but often worth the effort, are gifts that give away more value than the amount of lifetime credit utilized.  These gifts often involve a special valuation related to either a retained interest or charitable interest in the gift.  Common examples of these types of gifts are

• Qualified Personal Residence Trusts
• Charitable Lead Trusts
• Charitable Remainder Trusts
• Grantor Retained Income, Annuity or Unitrust Trusts

Asset and term selection are important to maximize the value of assets removed from your taxable estate utilizing these types of tools.

If you are looking for ways to reduce your taxable estate utilizing lifetime gifts, start off with the easy options of annual gifting, paying for medical and educational costs directly for the benefit of your children, grandchildren or other family members and loved ones.  To learn more about sophisticated gifting strategies or to discuss your personal wealth transfer goals and the options that would be right for you, please contact me at [email protected] or 609-689-9700.