One of the big changes that the new year is going to bring along that has an impact on estate planning is the return of the estate tax. One of the provisions of the sweeping tax cuts of 2001 was a repeal of the estate tax in 2010, but it will be returning again in 2011. This in and of itself is highly relevant, but in addition to its mere reappearance, the estate tax exclusion amount in 2011 will be just $1 million; it was $3.5 million when we last saw the tax in 2009.
For this reason a lot more people are going to have to do what is necessary to reduce the taxable value of their estates. One way of achieving this is to give tax-free gifts. Of course the IRS is well aware of the fact that people might try to avoid paying the estate tax by giving away their assets before they die, so there is a gift tax in place as a roadblock. However, there are gift tax exemptions that can be used to create some space and potentially keep your estate under the exclusion amount.
First off, there is a $1 million lifetime gift tax exclusion (as of this writing). So you can give gifts of up to a million dollars throughout your life without incurring any gift tax liability. But in addition to this, there is also a $13,000 per person annual exemption. What this means is that each individual can give gifts of up to $13,000 to as many recipients as they want to each year free of the gift tax. It is useful to emphasize the fact that this $13,000 exemption is for each taxpayer; so a married couple could pool their respective individual exemptions and give as much as $26,000 to an unlimited number of people in any given year.
Giving gifts is a great way to gain tax efficiency, and it is something that can be an invaluable estate planning tool under certain circumstances. In addition, you get to enjoy that special feeling that will come along with giving these gifts in the flesh, and that may be the biggest benefit of all.