Gift-giving as a means of estate planning

We have all heard the saying that it is better to give than to receive. This is especially true if you are a wealthy person who wants to minimize estate taxes. Giving away money or investment assets, whether to charities or to family members, reduces the size of your estate and therefore reduces the amount of estate and inheritance taxes that your estate will pay later.

The advantage of giving gifts during life is that you get the pleasure of seeing your loved ones enjoy the gift. It is a relatively low cost means of reducing your estate and can be as simple as writing a check. You don’t have to pay an estate planning lawyer to help you do it. However, you should get some initial guidance from an accountant or estate planning attorney on the laws covering these types of gifts so that you don’t inadvertently run up a big gift tax liability. Gift taxes are paid by the donor, not by the recipient of the gift. 

Both the IRS and the state of Tennessee limit the amount that a donor can give during life without incurring gift taxes. A donor can give $13,000 to anyone each year without incurring federal gift tax. Tennessee allows a donor to give $13,000 to close family members (Class A donees under the Tennessee gift tax law) without incurring Tennessee gift tax. For other relatives or non-relatives (Class B), the amount that can be given free of Tennessee gift tax is smaller.

The disadvantage of making a gift is that once you give the gift, you may not be able to get it back if you need it later. Before starting a program of gift-giving, make sure you have more than enough to take care of your own needs for the rest of your life.

A consistent practice of making annual gifts to family members can reduce the donor’s estate substantially over time. For example, a donor with 4 children and 8 grandchildren can give away $156,000 per year by making $13,000 gifts to each child and each grandchild. If each of those recipients is married, the donor could also give to the spouse of each child and each grandchild and the gifts would total $312,000 in a year. If these gifts are made consistently over 4 years, the donor’s estate would be reduced by $1,248,000 with minimal transfer costs. This technique is not an option for everyone, but it can be a low cost way to get your estate to your loved ones and save taxes later.

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