Make Gifts of Your Assets
Giving property to your family while you are living is an excellent estate planning device. It is simple and does not involve expensive legal fees to accomplish. You can reduce the size of your taxable estate very quickly by making annual gifts that do not exceed the annual exclusion and, thus, are not taxable and do not consume your savings account. Reread Chapter 17 for information about gifts that are not taxable.
Gifts of Property
You do not have to give cash to use the annual gift exclusion. You can give real or personal property as well. And you don't have to give all of one piece of property in only one year. For example, assume you have four children, and you own a piece of real estate that is worth $300,000. You and your spouse could give 34.66 percent of the real estate to your children this year ($104,000), 34.66 percent next year ($104,000), and the remaining 30.66 percent ($92,000) in the third year. You can do this without using any of your savings account because you and your spouse jointly gave each child $26,000 for the first two years and $23,000 in the third year, all within the annual gift exclusion amount.
You may also reduce your estate by paying school tuition or medical bills for others by making payments directly to a school or medical facility instead of to an individual. For example, you can make a payment of $15,000 directly to a university for your child's tuition; that is not considered a taxable gift even though it exceeds the annual exclusion.
If you exceed the annual gift exclusion amount for any person during the year, you begin to consume your savings account. If you own property that you think is going to increase in value very rapidly, it might make sense to use up your exclusion with taxable gifts. If you give away a $1 million-piece of property, using all of your lifetime gift exclusion, and the property becomes worth $3 million by the time you are gone, the $2 million of growth is not in your estate.
Wealthy individuals frequently use annual gifts to decrease their taxable estates. When you analyze the property you own, the cost basis of each piece of property, and your family's exposure to federal estate taxes, you will be able to decide whether you want to make current gifts to reduce your taxable base.
Keep in mind that property is valued at the time of the gift. If you use the gift exclusion to give your property to your children, they will not get a step-up in cost basis upon your death because they already own the property.
Charitable Bequests and Gifts
Another way to reduce your estate tax is to make current gifts to charity or to leave a gift to charity through a bequest or other method. Charitable giving methods will be covered in more detail in Chapter 19.