One of the easiest ways to decrease the value of your estate is to simply give money away.
The current limits are an annual $10,000 per person gift that is tax free. Your spouse can also give $10,000, so the amount doubles to $20,000 if you are married.
“Each person also has a lifetime gift tax exemption of $1 million” says Patrick Saccogna, a senior manager with Arthur Andersen and president of the Estate Planning Council of Cleveland. “You can divide that up amongst your children any way you want.”
Again, if you’re married, your spouse also has $1 million to give. Last year, the lifetime limit was $675,000. If you already used that amount, then you have an additional $325,000 to use without penalty.
“There’s never been a better time to be gifting money, generally speaking,” says Saccogna.
If you’ve maxed out your tax-free gift giving limits, there are some loopholes you can use to pass money on to family members without incurring penalties.
“Many people overlook the fact that you can write checks in unlimited amounts directly to an educational institution to pay tuition,” says Saccogna. “It does not count against your gift total.”
The check must go directly to the institution and not the family member first, otherwise it will count against your total. The institution does not have to be college, but could be any school at any level, such as an elementary school or boarding school with a tuition requirement.
If the family member has any special medical needs, those can be paid directly in much the same way as tuition without having the money count towards your lifetime limit.
Another method is to set up a partnership and transfer money or assets to the partnership. Basically, family members are made minority partners with you controlling the voting rights and distributions. Because of the limited liquidity of the partnership assets, you receive discounted valuations for tax purposes. For example, a $100 stock share outside the partnership might only be taxed at $75 of value in the partnership.
“Many people have estates the size of elephants, and what we’re trying to do is squeeze them through a small keyhole of exemptions and exclusions,” says Saccogna. “The challenge is to shrink the value.”