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Gifting to Accomplish Estate Planning Objectives

Estate planning can be a complicated process. With taxes, deductions, exemptions and an endless variety of different personal situations, the use of gifting as a form of estate planning can be an overwhelming task for the lay planner.  Both the Federal and Pennsylvania governments impose taxes on certain types of “gratuitous” transfers made from one individual to another during the taxpayer’s lifetime.   Familiarizing one’s self with the manner in which the Federal gift tax is assessed upon certain types of gifting can aid individuals as they use such gifts to accomplish their estate planning goals.  Knowledge of certain little-known exceptions to the Federal gift tax can mean significant tax savings for informed individuals managing their estates:

Gifts Not Subject to Federal Gift Tax

Statutory provisions expressly exempt certain gift transfers from the imposition of the Federal gift tax.  Spouses are generally permitted to make unlimited tax-exempt gifts between themselves. Payments for educational tuition and medical care are not considered to qualify as gifts for purposes of the Federal gift tax.  Finally, there are no limitations as to the amount of gift tax-free transfers that can be made to political organizations and certain tax-exempt organizations, such as religious, educational, governmental and other organizations.

Annual Exclusion Gifts

Federal gift tax laws allow a taxpayer to make aggregate gifts of up to $14,000 a year to each recipient.  There is no limitation as to the number of recipients that can receive gifts from a single taxpayer. The recipient’s relationship to the donor does not matter. Children, grandchildren, other family members, friends, and even total strangers can receive the full amount without the donor paying Federal gift tax.  Couples can combine their annual exclusions and give a total of $28,000 to a donee within any tax year.  When combined with the statutory exemptions given to the types of gifts mentioned above, most gifts to individuals will not qualify as taxable gifts.

Unified Credit

Gifts made in excess of the annual exclusion can still be made without incurring Federal gift tax liability if a portion of one’s “unified credit” is applied to one’s lifetime gifts.  The unified credit exempts an inflation-adjusted amount of donative transfers made by an individual and/or his or her estate from both the Federal gift tax and the Federal estate tax.  In 2016, the unified credit exempts the first $5.45 million in transfers that are not protected by the annual exclusion from gift taxes.  A taxpayer can apply this unified credit to implement an estate plan through lifetime gifting.  Utilization of the unified credit, however, requires the filing of a Federal gift tax return with the Internal Revenue Service to ensure proper recognition of the credit being applied towards those gifts.

Federal Gift Tax Rate

If gifts are made that are not fully covered by a statutory exclusion, the annual exemption or the unified credit, the Internal Revenue Code will assess the gift tax against the uncovered portion of the gift (called the “taxable estate”).  The Federal gift tax rate progressively increases based on the size of the taxable estate.  In 2016, Federal gift tax rates range from 18% for taxable estates less than $10,000 to 40% for taxable estates in excess of $1,000,000.00.

Although most gifts made by individuals will not be subject to the Federal gift tax, taxpayers should still be cognizant of other potential legal issues surrounding the making of such gifts.  Recent gifts could potentially disqualify nursing home patients from receiving Medicaid for their long-term skilled nursing.  Gifts made within a short period before one’s death could lead to Pennsylvania inheritance tax liability.  For these and a number of other reasons, it would be wise to consult a seasoned estate planning attorney to ensure that the use of gifting appropriately accomplishes one’s estate planning goals without adverse tax and legal consequences.

Individuals focused on preserving their estate for their loved ones can accomplish their estate planning goals by seeking the assistance of Kozloff Stoudt Attorneys, the premier estate planning and accident attorneys in Berks County.  We concentrate on estate planning, probate and non-probate estate administration, general trust law, special needs planning, non-profit organizations and related areas of taxation.  As a trusted law firm that continues a proud tradition of serving Southeastern, PA over the last 70 years, Kozloff Stoudt can deliver trust and estate services capable of preventing these adverse consequences in a manner that can yield significant financial savings.  Whether you are in need of estate planning services, assistance with understanding corporate law, or involved in personal injury litigation related to a motorcycle accident in Reading, PA, Kozloff Stoudt is ready to help. To find out more about how we can assist you, please call us at 610-370-6700.

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