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Using Lifetime Gifts to Reduce Estate Taxes

As of January 1, 2011, the Federal Tax Relief Act reinstated the estate tax, sometimes referred to as an inheritance tax, with a current exemption of $11.25 million and a tax rate of 40 percent. Upon your death, your entire estate – anything considered assets – will be totaled up and assessed to determine if your estate is subject to this tax. In Massachusetts, the current estate tax threshold is $1 million in assets at the time of death.

For those of you who have estates in excess of or near $1 million – whether through the value of your own assets or through those you may inherit over the coming years – it is advantageous to start reducing the amount of your estate now in order to avoid the tax. Obviously, you can squander your money frivolously but you probably did not amass your assets for that purpose. Better to wisely use tax-free gifts to reduce the amount of your estate.

Gifts to Spouses

If you are married and your spouse is a U.S. citizen, you can give gifts to your spouse, in any amount, tax-free. Keep in mind, however, that any amounts you have designated to your spouse in your will and retirement accounts will be added to his or her estate, so avoid gifting money that would cause your spouse’s estate to be in excess of $1 million upon your death.

Gifts to Others

The federal government has a tax exemption rule which allows to you give tax-free gifts in the amount of $15,000 per person, per year. For example, if you have 10 family members you want to give cash as presents, you can give each one of them $15,000 without anyone having to pay a gift tax on the amount received. The annual gift exclusion is based on the calendar year so you could, if you wanted, help your son with a $25,000 down payment on a house by giving him $15,000 on December 31 and the additional $10,000 on January 1.

Federal laws change frequently. There may be other rules that apply to your particular circumstances so review your estate plan with a knowledgeable estate planning attorney on a regular basis and revise your plan as laws change. Life events in your family may also require revisions in your plan and include marriage, divorce, births and deaths of family members and other heirs.