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With the right strategy lifetime gifts could reduce tax liability

Can making lifetime gifts really reduce your tax liability in the future?

by Susan Wright | Contributor
October 27, 2020

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Believe it or not, today’s federal income tax rates are actually quite low, compared to where they have been throughout the last century. In fact, in 49 of the past 107 years, these tax rates have been 70% or more.

On the other hand, at $11.58 million per person (in 2020), the estate and gift tax exemption has never been so high. So, if you are looking for a tax-efficient way to transfer assets in the future, making lifetime gifts could be a solution – but only if this strategy is implemented in the right way.

How much of your income and estate will end up in Uncle Sam's hands?

Throughout our entire lives, taxes can play a key role. For instance, tax is oftentimes charged on the items and services that we purchase. They are also either deducted or paid, based on the amount of income we earn.

Top Federal Income Tax Rates 1913 - 2021

Year Rate
Year2018 - 2021 Rate37
Year2013 - 2017 Rate39.6
Year2003 - 2012 Rate35
Year2002 Rate38.6
Year2001 Rate39.1
Year1993 - 2000 Rate39.6
Year1991 - 1992 Rate31
Year1988 - 1990 Rate28
Year1987 Rate38.5
Year1982 - 1986 Rate50
Year1981 Rate69.125
Year1971 - 1980 Rate70
Year1970 Rate71.75
Year1969 Rate77
Year1968 Rate75.25
Year1965 - 1967 Rate70
Year1964 Rate77
Year1954 - 1963 Rate91
Year1952 - 1953 Rate92
Year1951 Rate91
Year1950 Rate84.36
Year1948 - 1949 Rate82.13
Year1946 - 1947 Rate86.45
Year1944 - 1945 Rate94
Year1942 - 1943 Rate88
Year1941 Rate81
Year1940 Rate81.1
Year1936 -1939 Rate79
Year1932 - 1935 Rate63
Year1930 - 1931 Rate25
Year1929 Rate24
Year1925 - 1928 Rate25
Year1924 Rate46
Year1923 Rate43.5
Year1922 Rate58
Year1919 - 1921 Rate73
Year1918 Rate77
Year1917 Rate67
Year1916 Rate15
Year1913 - 1915 Rate7

In some cases, Uncle Sam can actually reap more of the benefit from your hard work than you or your loved ones do. So, it is important that you are not just aware of your potential tax liabilities, but that you also plan ahead for them.

When it comes to income, there are various deductions and credits available that can reduce the amount of taxes that you owe (or that can increase your tax refund). But what about estate or asset transfer taxes?

Given the high rate of the gift tax exemption today, many financial professionals are suggesting that investors make lifetime gifts in order to reduce the size of their taxable estate. But, if you fall into this category, it is better to do so sooner rather than later, because it is anticipated that the amount of this exemption will be reduced in the future.

Estate and Gift Tax Exemption Rates

Year Estate Tax Rate Gift Tax Rate Estate Tax Exemption Lifetime Gift Exemption Annual Gift Exclusion (per person)
Year2007 Estate Tax Rate45% Gift Tax Rate45% Estate Tax Exemption$2 million Lifetime Gift Exemption$1 million Annual Gift Exclusion (per person)$12,000
Year2008 Estate Tax Rate45% Gift Tax Rate45% Estate Tax Exemption$2 million Lifetime Gift Exemption$1 million Annual Gift Exclusion (per person)$12,000
Year2009 Estate Tax Rate45% Gift Tax Rate45% Estate Tax Exemption$3.5 million Lifetime Gift Exemption$1 million Annual Gift Exclusion (per person)$13,000
Year2010 Estate Tax Rate0% Gift Tax Rate35% Estate Tax ExemptionN/A Lifetime Gift Exemption$1 million Annual Gift Exclusion (per person)$13,000
Year2011 Estate Tax Rate35% Gift Tax Rate35% Estate Tax Exemption$5 million Lifetime Gift Exemption$5 million Annual Gift Exclusion (per person)$13,000
Year2012 Estate Tax Rate35% Gift Tax Rate35% Estate Tax Exemption$5.12 million Lifetime Gift Exemption$5.12 million Annual Gift Exclusion (per person)$13,000
Year2013 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$5.25 million Lifetime Gift Exemption$5.25 million Annual Gift Exclusion (per person)$14,000
Year2014 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$5.34 million Lifetime Gift Exemption$5.34 million Annual Gift Exclusion (per person)$14,000
Year2015 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$5.43 million Lifetime Gift Exemption$5.43 million Annual Gift Exclusion (per person)$14,000
Year2016 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$5.45 million Lifetime Gift Exemption$5.45 million Annual Gift Exclusion (per person)$14,000
Year2017 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$5.49 million Lifetime Gift Exemption$5.49 million Annual Gift Exclusion (per person)$14,000
Year2018 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$11.18 million Lifetime Gift Exemption$11.18 million Annual Gift Exclusion (per person)$15,000
Year2019 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$11.40 million Lifetime Gift Exemption$11.40 million Annual Gift Exclusion (per person)$15,000
Year2020 Estate Tax Rate40% Gift Tax Rate40% Estate Tax Exemption$11.58 million Lifetime Gift Exemption$11.58 million Annual Gift Exclusion (per person)$15,000

Based on the unlimited marital deduction, a married individual is allowed to pass any amount of his or her assets to their spouse free of taxation. However, at the death of the second spouse, the net amount of assets that is passed to the survivors can be reduced significantly due to both federal and state estate taxes.

According to the IRS, the estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interest in at the time you pass away.

These items could include some or all of the following:

  • Cash
  • Stocks, bonds, mutual funds and other investments
  • Real estate
  • Life insurance proceeds (if you have ownership in the policy)
  • Annuities
  • Business interests

Current estate planning law (as of 2020) allows for the exemption of $11.58 million per person. However, if you (and your spouse) hold a significant amount of assets above this amount, it could make sense to start gifting them away.

One option for doing so is to simply “gift” cash, investments and/or other items of value directly to others for the purpose of reducing the amount of your taxable estate. The law now allows individuals to gift up to $15,000 annually to an unlimited number of recipients. So, if you are married, you and your spouse together could give non-taxable gifts of up to $30,000.

Another way to use lifetime gifting for reducing your taxable estate is to directly make payments of tuition and/or medical expenses on behalf of another individual. This can also be accomplished free of the federal gift tax.

In addition to simply lowering the amount of your taxable estate, gifting away assets can also reduce the future appreciation of those assets, which can work to keep the amount of your taxable estate at death lower.

Although making lifetime gifts can have many advantages, though, there are also some items to consider before moving forward. For instance, if you gift away assets or property (prior to your death) that have appreciated, the recipient will take on your original cost basis – and this could result in him or her incurring a higher tax in the future when they sell or give the asset away.

Also, in addition to federal estate taxes, there are some states that also impose state estate tax and/or an inheritance tax. These states include (in 2020) Washington, Hawaii, Oregon, Minnesota, Vermont, Maine, New York, Massachusetts, Rhode Island, Connecticut, Nebraska, Iowa, Illinois, Kentucky, Pennsylvania, New Jersey and Maryland. Washington, D.C., is also on this list.

Pros and Cons of Lifetime Gifts for Passing on Wealth

Advantages of Lifetime Gifts Drawbacks of Lifetime Gifts
Advantages of Lifetime GiftsCan reduce the taxable portion of your estate (and in turn, the amount of estate tax due) Drawbacks of Lifetime GiftsYou give up control of the gifted assets
Advantages of Lifetime GiftsReduces the taxable appreciation of assets Drawbacks of Lifetime GiftsGifts of appreciated property while you are still alive will retain your cost basis (and in turn, lead to higher taxation when the recipient sells or gives the asset away)
Advantages of Lifetime GiftsBenefits other individuals and can reduce their costs for educational and/or medical needs Drawbacks of Lifetime GiftsYou could still be liable for state estate taxes

Do you have the most tax-efficient asset transfer strategy in place?

Making sure that loved ones and other entities (such as charitable organizations) receive as much as possible in the future can take some advanced planning. But with the wrong strategy in place, it could actually increase the tax liability on your estate.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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