When “taxable” gifts save taxes

16 May When “taxable” gifts save taxes

Case Study V

Maureen has an estate of $8 million. In 2015, she has already made $14,000 annual exclusion gifts to each of her chosen beneficiaries. She’s pleased that the $5.43 million gift and estate tax exemption will continue to be indexed for inflation. But she believes her estate will grow at a much faster rate and is concerned that she could have substantial estate tax exposure. So she gives away an additional $3 million of assets.

Maureen uses $3 million of her gift tax exemption by making the taxable gift. Therefore, her estate can’t use that amount as an exemption. But by making the taxable gift, she also removes the future appreciation from her estate. If the assets, say, double in value before Maureen’s death, the gift will essentially have removed $6 million from her estate. This amount escapes the estate tax.

One caveat Watch out for taxable gifts made within three years of the date of death, because they may have to be brought back into the estate as though they had never been made.