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Gift and Estate Tax Planning

Consider implementing gift and estate planning strategies to transfer wealth to younger generations while minimizing transfer taxes.

  1. Annual exclusion gifts. The tried and true strategy of making maximum annual exclusion gifts still constitutes good planning. For 2018, a donor can give $15,000 per donee, or $30,000 per donee from a married couple. Taxpayers might want to consider giving income-producing assets to children in lower income tax brackets to reduce the overall tax burden to the family. Keep in mind that unearned income of children under 18 (or 24 if a full-time student) above $2,100 are taxed at trust rates. In 2018, the top trust bracket of 37% applies to income over $12,500.
  2. Lifetime gifts. The new tax law effectively doubles the gift, estate and generation skipping transfer (GST) tax exemptions to $11,180,000 (in 2018, adjusted for inflation annually). However, the exemptions are scheduled to revert to approximately $6,000,000 in 2026. Taxpayers with large estates should consider using the increases in the gift and GST exemptions to make large gifts to dynasty trusts, creating funds that can endure for multiple generations and providing descendants with increased creditor protection, professional money management, and responsible spending patterns. For those with existing estate planning arrangements involving split dollar plans or instalment sales, use the increased exemptions to repay the amounts owned and terminate the arrangements.
  3. Planning for education. Combining education savings with gifts can accomplish multiple goals with one plan. Gifts to a Section 529 savings plan can use up to 5 years of a donor’s annual exclusion gifts in a single year without creating a taxable gift ($75,000 in 2018). Assets in the 529 plan are not income taxed as they grow and can escape income tax forever if used for qualified higher education expenses or elementary or secondary school tuition. What’s more, the value of the 529 plan is not included in the account owner’s (e.g., Mom’s) estate, even if she retains all the power over the account up to the day she dies. In addition to and separate from gifts to 529 plans, a donor can make direct payments of tuition to educational institutions – without any maximum limit – as these are not counted as gifts at all, not even chipping away at the $15,000 annual exclusion.