If you have assets that are in excess of the federal estate tax exclusion amount you have to take steps to gain tax efficiency. Giving gifts that are tax-free would be one possibility, but this is not as easy as it may sound.
Any time you transfer property to someone else it is considered to be a taxable gift. The reason why you don’t have to pay taxes most of the time is because there are exemptions.
One of these is the lifetime combined gift/estate tax exclusion. It has a base of $5 million that is annually adjusted for inflation. This year the exclusion is $5.25 million after having been adjusted.
To provide an example of how this works, if you gave $1.25 million in taxable gifts throughout your life only $4 million would be left to apply to your estate.
There is a way to give tax-free gifts without reducing your available unified exclusion. There is an annual per person exclusion that you can take advantage of to give tax-free gifts, and this exists in addition to the unified exclusion. At the present time the amount of this exclusion is $14,000.
If you have someone on your inheritance list who will be attending college in the future you could fund a 529 college savings account for the benefit of this individual. By doing this you are reducing the value of your estate.
Placing funds into the plan is an act of taxable gift giving. But you can indeed divest yourself of these assets in a tax-free manner by keeping your annual contributions within the $14,000 limit.
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