This article uses 2017 Estate and Gift Tax Limits.

Looking at your bank account, it’s easy to think that gifting money to a child as part of your budget just isn’t feasible. You may have a mortgage, car payments, credit card bills – and all the other day to day expenses that make a big dent.

However, if you are pushing slowly and surely to either state or federal Estate TaxFederal Estate Tax: The federal estate is part of a unified federal gift and estate tax that is an excise on the transfer of wealth. Read More exemption totals in total assets, gifting might just be what keeps you below the surface. In Massachusetts, an estate totaling over $1 million in total assets is subject to taxation. For married couples, no tax is owed on the first spouse to pass away, but planning is very important.

For example, if your home is worth $600K and you have two retirement accounts worth over $500K, then you are over the Massachusetts estate tax threshold and roughly $38,000 would be due following both our deaths.

So what can you do to reduce estate tax?  

For one thing, you can incorporate trust planning into your estate. This is often called “A-B” trust planning, whereby you preserve up to a $1 Million dollars in exemption, accessible to your spouse but that bypasses his or her estate for tax purposes.

You can also consider a life insurance policy so that your beneficiaries can use the payout to pay for any estate taxes. Even better, you can keep life insurance proceeds from becoming part of your estate and themselves being taxed by creating an Irrevocable Life Insurance Trust. Borchers Trust Law can assist you with the trust planning aspect of these options.

But the use of a third option may reduce your taxable estate without any intensive planning or expense: The Yearly Gift of up to $14,000 per person.

For example, if you have two daughters who are happily married, trying to pay down their mortgages, you can potentially give each family as much as a $56,000.00 gift, without any tax filings necessary. That’s a total of $112,000.00 that is removed from your estate in just one year. If repeated, this approach can add up to a significant total.

Gifting is not without risk of course.  By giving assets to an individual, you are giving up the right to that property.  A gift to a married couple, however, if there is a divorce or separation, will make hard to consider that money as being only in your child’s control. Additionally, if any child or child’s spouse is subject to a lawsuit, creditors could certainly look to attach any of the gifted property.

And what about minor children, or teenagers?

One way to contribute to a child as part of their education plan is gifting the $14,000.00 yearly exemption amount directly to a 529 Plan (for Massachusetts residents, one option is called the MEFA U Fund). This is something that they don’t even need to know about. Then when it comes time to apply to colleges, you could potentially have most of what it takes to pay for tuition, without any taxes on the gains. Sounds too good to be true!

What alternative do I have to a 529B Plan for minor children?

One way of protecting assets for future generations is to set up a Trust with “Crummey provisions.” In a Crummey trust, the donor can gift the $14,000 (or current yearly gift amount) and have it only be accessible to the beneficiary for a limited time. By allowing a window of time whereby the recipient can access the money, it satisfies the rules in IRS standards for a present-day gift. If the recipient didn’t have at least some time period to access the gift, it would not qualify for the yearly exclusion. The child will also not have immediate access to the funds if properly drafted.

What if I am gifting more than $14,000 to my son/child?

Each individual has a lifetime gift tax exemption of $5,495,000 presently.  That means that you can certainly give more than $14,000 to your son, but you will need to file a Gift Tax Return (Form 709, best prepared by your CPA or estate planning attorney) for the year of the gift. If you keep your gifts to the exemption amount, you will not need to file anything. It’s always good to keep private records though of any gifts you make each year.

As you can see, maximizing the gifting opportunities during your lifetime can be a great way to reduce estate tax burdens and also compliment your existing estate plan.

Contact us today if you have any questions or need legal advice.

IRS Regulations (Circular 230, as amended) require the following disclaimer: To the extent this communication sets forth tax advice, you may not rely on it to avoid tax penalty.