The big news in the estate planning community as 2010 is set to become 2011 is the return of the estate tax. This federal levy was first enacted back in 1916, and it had been collected in earnest each and every year until 2010 when it was repealed as a result of the tax relief legislation that was passed in 2001. However, the estate tax is coming back in 2011, and it is the exclusion amount that has gotten a lot of attention. In 2009 the estate tax exemption was $3.5 million, but in 2011 it is going all the way down to just $1 million.
As a result of this reduction in the exclusion, people with estates valued between one million and $3.5 million suddenly find themselves in the cross hairs of the tax man. So for these taxpayers and those who have been over the exclusion all along, it is necessary to implement strategies that provide estate tax efficiency. One of these that provides a host of advantages is the practice of tax-free gift giving.
The first thing to take into consideration is the fact that there is a $1 million lifetime gift tax exemption. The first million dollars that you give in gifts throughout your life is free of the gift tax regardless of whether it is a one-time gift of $1 million or a combination of gifts given over many years.
This lifetime exclusion provides some flexibility, but in addition to that, there is an annual $13,000 per person exemption that does not count against your lifetime exclusion. So you can give as much as $13,000 to as many recipients as you choose to in any given year free of the gift tax. This exemption is available to each individual, so a couple would have the ability to pool their respective exemptions and give out as much as $26,000 to an unlimited number of people each year.
As you can see, gift giving can provide you with a way to transfer assets to your loved ones incrementally over a period of time to reduce your estate tax liability. And as an added bonus you get to see the look of surprise and subsequent gratitude cross their faces, and that is a tax-free gift in its own right.