There are two common reasons that people add annual gifts or strategic gifting to their estate plans. The first is that they want to watch their loved ones enjoy their inheritance. Receiving money a bit at a time might mean that family members can go on a vacation or buy a house while you are still alive. You can watch them enjoy what you always intended would be their inheritance.
The other reason people make strategic annual gifts is to reduce what their estate is worth so that they can qualify for Medicaid later or avoid estate taxes. Especially if your goal is to limit estate tax liabilities, strategic gifts can actually create a second form of risk that you need to address in your plan.
Recent gifts will be part of your estate
To determine if you have enough property left in your name for estate taxes to apply, you have to look at recent financial transactions, not just the value of your personal property. The Internal Revenue Service (IRS) will look back at three years of gifts and add their total value to the value of the remaining assets in your estate.
The closer your plan is to the threshold for estate tax exemption, the greater the risk that the gifts you make in the last years of your life could trigger estate taxes. After all, you can give each potential beneficiary up to $16,000 without triggering gift taxes every year. If you make the maximum gift to all four of your children and also all of your grandchildren, three years’ worth of gifts could very easily push your estate over the exemption threshold and put you at risk of estate taxes after you die.
Trusts can be a useful tool for large estates
If you have to worry about estate taxes when planning and multi-million dollar legacy, a trust is a very useful tool to employ in conjunction with strategic gifts. Rather than relying on one or the other, a combination of these two approaches can successfully diminish the total value of your estate while reducing both estate and gift tax obligations.
Familiarizing yourself with the unique rules that apply to large estates will help you create the most effective estate plan given your current holdings and the legacy that you want to leave when you die.