At the present time, we have an estate tax in place that carries a 40 percent maximum rate. Most people are not exposed to the tax, but it is a significant factor for high net worth individuals. During the 2018 calendar year, the estate tax exclusion is $11.2 million. Anything that is transferred that exceeds this amount would be subject the death tax.
If you were thinking that you may be able to give gifts while you are still alive in an effort to circumvent this harsh federal levy, there is a roadblock in your way in the form of the gift tax, which also carries a 40 percent rate. The gift tax and the estate tax are unified under the tax code. This means that the $11.2 million exclusion encompasses your estate and large gifts that you may give during your life.
Annual Gift Tax Exclusion
We all know in a general sense that it is a good feeling to give something to the people that we love. But when you actually have a renewed experience of doing so it really hits home in a direct way. A good opportunity exists to enjoy this type of feeling when you are engaged in legacy planning. And as a bonus there are positive tax implications that go along with this course of action.
What we are referring to is the practice of tax-free gifting. When you think about it, estate planning is all about giving gifts, only these gifts are being passed on after your death. This kind of gift is a mixed bag for the recipient. Yes, of course, it’s great to receive an influx of money. But at the same time, when this windfall came about due to the death of someone that you love it is certainly no cause for joyous celebration. In fact, people don’t talk about it much but this is an inherent conflict that exists and there is little that anyone can do about it.
However, if you give gifts to your loved ones while you are still alive there are no conflicts, and you are making a statement about your intentions that can alleviate any such feelings after your passing. While it is true that there is a gift tax in place to dissuade people from giving gifts in an effort to reduce their estate tax liability, there are exemptions. One of them allows each individual to give gifts valued at up to $15,000 to any number of people without incurring any gift tax liability.
This is allotted to each taxpayer, so a married couple could pool their individual exemptions and give gifts equaling as much us $30,000 per year. Sustained gift giving over a number of years could shift significant assets over to your heirs while you’re still alive and go a long way toward reducing the value of your estate for estate tax purposes.
Zeroed-Out GRAT Strategy
There are some other strategies that can be implemented to transfer assets to your loved ones while you are still alive in a tax efficient manner. One way that this can be done is through the successful execution of the “zeroed out” GRAT strategy.
A GRAT is a grantor retained annuity trust, and when you create the trust you fund it, set a term, and name a beneficiary. The key is to fund the GRAT with assets that you expect to appreciate considerably. You as the grantor receive annuity payments from the trust over its term.
The act of funding the trust constitutes a taxable gift, and the anticipated appreciation is estimated by the IRS using 120 percent of the federal midterm rate that was in place when the trust was created. So you zero out the GRAT by taking annuity payments equal to the entire value of the trust (or as close as you can get) over its term and as a result you pay little or no gift tax.
The zeroed out GRAT strategy is successfully executed with the assets in the trust appreciate beyond the original IRS estimate. Should this take place, the beneficiary assumes ownership of the remainder free of the gift tax.
Learn More About Estate Tax Asset Protection!
Our Mount Clemens asset protection attorneys have developed a valuable worksheet that you can use to start to map out your estate plan. You can click this link to get your copy, and there is a contact form on this website that you can use if you would like to request a consultation.