Tax Planning During your Life to Reduce your Estate Upon Death

Transfers with gift tax consequences:

Estate taxes can be reduced by transferring assets during the life of an individual.  Each person has a combined $5 million lifetime gift and estate tax exemption called “exclusion”.   The exemption is indexed with inflation.  In 2016, the exclusion amount is $5,450,000.  This means that you can make gifts during your life up to $5 million without having to pay taxes.  Above this amount federal taxes will be due with a maximum gift tax rate of 40%.

Transfers with no gift tax consequence:

Besides the $5 million lifetime gift and estate tax exclusion, certain uncompensated transfers do not qualify as gifts, such as tuition fees or medical expenses.  In addition, an annual gift tax exemption exists, called “annual exclusion.”  Originally at $10,000, this amount is indexed to the cost of living.  In 2016, the annual exclusion is $14,000 per donee.  For instance, you can give $140,000 in 2016 using the annual exclusion if you give $14,000 to 10 persons.  

Limiting the Gift Tax Consequences of your Transfers:

There are different gifting strategies including charitable giving, irrevocable life insurance trusts (ILIT), and other trusts such as Qualified Personal Residence Trust (QPRT), Grantor Retained Annuity Trust (GRAT), or Generation Skipping Trusts (GST).   

An Irrevocable Life Insurance Trust (ILIT) offers the opportunity of escaping taxes.  The trust will be the owner of the life insurance policy.  Because of the use of the annual exclusion under a special system, all life insurance proceeds can pass free of tax through generations.  

A Grantor Retained Annuity Trust (GRAT) is created for a period of time.  The donor receives an annual payment from the annuity.  At the end of the term, the balance of the trust passes to the donees.  Because the donor retained an interest for a period of time, the gift tax is reduced by this interest.   

A Qualified Personal Residence Trust (QPRT) is a similar technique to a GRAT.  The donor of the real estate property retains the right to live in the house for years, rent free, and at the end of the term, the remaining beneficiaries of the trust become fully vested owners.  Again the retained interest provides a discount on the value of the gift, reducing the gift tax liability.  

Certain charitable trusts provide a similar tax benefit but the discount is provided because a portion of the trust is gifted to a charity.

In a Generation Skipping Trust (GST) assets can pass directly to grandchildren and limit the tax consequences of the transfer to a “skip” person (a grandchild).

Please contact Miorini Law, PLLC at (703) 448-6121 or via email to yahne.miorini@miorinilaw.com to learn more about these techniques and whether you should consider them.