How Do Annual Family Gifts Reduce Estate Taxes?

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Annual family gifts reduce estate taxes for individuals who have funds that they want to turn into tax-exempt gifts.  You may be nowhere near the exemption limit for federal estate taxes (currently $11.4 million).  But the Massachusetts limit is much lower- $1 million per person- and includes assets you may not consider part of your estate, like life insurance proceeds, the equity in your home, and retirement accounts.  As a result, many middle class families are affected by the Massachusetts estate tax, and could face a heavy tax burden without careful planning.

Shrinking your estate taxes is about making sure your hard-earned and meticulously-saved money will be used for purposes important to you — like paying for your grandchildren’s college educations — not going into government pockets.  There are many tools available to an estate planning lawyer to shelter assets without giving them away, but sometimes you simply have to reduce the overall size of your estate in order to minimize tax liability.

By starting to give your wealth away now, you minimize and avoid estate taxes that otherwise could eat up your wealth.

If that sounds confusing, don’t worry. Here’s everything you need to know about how annual family gifts reduce estate taxes — plus some important financial changes this year.

How Annual Family Gifts Work

One way to reduce estate taxes is to cut the value of your estate by giving annual gifts. An annual family gift, often called an exclusion gift, is simple: It’s a gift that qualifies for annual exclusion from federal gift taxes. This means you won’t have to pay taxes on that specific amount.  Under the federal tax laws, you can give away a certain amount of money to any given person each year without having to pay a gift tax.  Once that money is given away, it is no longer part of your estate and therefore will also not count for estate tax purposes.  

Annual giving usually includes gifts of:

•   Cash
•   Stocks
•   Bonds
•   Real estate
•   Family loan debt forgiveness (that doesn’t exceed annual gift tax exclusion)

For example, if you are a parent or grandparent, you would be given an annual exclusion amount to gift, which you can give to an unlimited number of people like grandchildren, children, nieces, nephews, etc., during that year.  If your children are married, you can gift $15,000 to your child and another $15,000 to their spouse, to increase the amount you can move out of our estate in a single year.  If your child has three children, you can gift $15,000 for each child into a trust or college savings account established for those children.  Gifts aren’t restricted to family — non-family members can receive gifts, too.

How Much Can You Gift to Reduce Tax?

The amount is set each year by the IRS through a revenue procedure and is usually published in early November for the following year.

The annual gift exclusion amount is $15,000 for this year. And married couples can combine their giving power to collectively gift $30,000 to one recipient.

Currently, and through the remainder of 2018, the 2017 Tax Cuts and Job Acts increased the lifetime estate and gift tax exemption to $11.180 million per person. That means that you don’t pay any federal taxes on your estate until you’ve exceeded this limit.

Also, you should know that annual gifts made during your lifetime don’t count towards this limit, unless you give more than the annual limit. For example, if you gift someone $20,000, the excess $5,000 will reduce your lifetime estate and gift tax exemption by that much – and you’ll owe taxes on it as well.

If you have an ownership interest in a small business as part of your estate, you can also give away interests in that business as part of your annual gifting strategy.  If the business is "closely held," meaning it is not a publicly traded company (most family businesses are closely held), the IRS allows you to discount the valuation of the business for purposes of determining the value of a gift of shares.  You are also allowed to discount the value of the ownership interest if what you are giving away is not a majority or controlling interest.   This is often the first place people should look for a gifting strategy, because it allows you to move more real value out of your estate within the gift tax limits than if you were to give away liquid assets like cash or publicly traded stocks.

Alternative Solutions

There are various other ways to make sure you reduce estate taxes. One of our best suggestions?
Work with an estate lawyer to create trusts for you and your spouse that effectively double your exemption, and, if you are still at risk for owing estate tax, consider moving some assets into an irrevocable trust that takes them out of your estate.  

Want to give gifts to reduce your estate taxes this year? There’s still time to figure it out with an SLN Law consultation!

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About slnlaw

We are a Massachusetts law firm focused on business law, employment law, and estate planning. Our team includes attorneys with large law firm experience, public service experience, experience working with small businesses on a wide variety of matters, an attorney with an advanced degree (LLM), and a former clerk to the Massachusetts Supreme Judicial Court.  Attorney and founder Emily Smith-Lee has been named to the Massachusetts Super Lawyers list every year since 2013, and was recently named a 2018 Lawyer of the Year by Massachusetts Lawyers Weekly.  Our lead estate planning attorney Jenna Ordway has been recognized as a top estate planning attorney, and has published a book about estate planning in Massachusetts.
 
What We Do

• Employment Law: We advise both businesses and individuals about Massachusetts and federal employment laws, and represent them as needed in litigation if a lawsuit cannot be avoided. 
• Business Law: In addition to providing advice on employment matters and defense of employee lawsuits, we can help you set up your new business, review your agreements with vendors and customers, resolve or litigate business disputes, and much more. 
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​We also have an extensive network of other professionals, some lawyers in other practice areas and others who are non-lawyer professionals who offer services that our clients frequently need.  If the problem you need solved is not one that we handle, we are happy to provide a referral to someone we know you can trust.

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"It was a pleasure working with Emily Smith-Lee on a business matter. She willingly shares her expertise and always listens to her clients' concerns. Emily's caring demeanor puts people at ease immediately. The outcome of my experience was quite favorable. I would highly recommend them."  Camille B.

​"Emily is an incredible resource of knowledge on employment law. She helped guide us on how to structure our employee classifications and made adjustments to our consulting agreements so our business is better protected and positioned. She's both law-savvy and business minded - great asset to have when launching/growing a business."  Diana B.

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​"Previously, I spoke with a couple other lawyers and I did not feel comfortable with their approach prior to calling Emily. Jenna did an excellent job in assessing what I wanted to accomplish and completed my will, trust and other documents in a very short time. I am so happy I made the right choice in choosing slnlaw as my estate team."  Evelyn W.

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