As the saying goes, there is nothing certain except for death and taxes...the good news is the estate tax exemption continues to increase.

The IRS has confirmed that the estate tax exemption amount will increase to $5.43 million per individual this next year; due to the application of the inflation adjustment (2014 exemption was $5.34 million).   Bottom line, this provides each individual with an additional $90,000 that could be passed on tax-free to their heirs.  Married couples have the benefit of planning with two exemption amounts, allowing them to pass an additional $180,000, for a total of $10.86 million, to their heirs before incurring any estate tax. 

It is important to understand that your lifetime gift tax exemption is tied to the estate tax exemption, so the increasing estate tax exemption allows you to make tax-free gifts during your lifetime, at the same levels you could leave to your heirs at death.  To protect yourself and the recipients of any gifts you make during your lifetime, you should keep careful records.  At the end of the day, all lifetime gifts that your make (*over and above the annual gift tax exclusions amount – see below) will apply against your estate tax exemption.  The only exception to this would be transfers, or gifts, between US spouses, which are unlimited.

As an alternative to giving outright gifts, many affluent people establish irrevocable trusts during their lifetime and fund them with assets valued in an amount up to the exemption amount.  The beneficiaries of these trusts are most often their children and grandchildren who can benefit from the trusts for many years to come.  As the exemption amount increases, they can make additional gifts into the trust.  These trust assets could continue to increase in value during their lifetime, and following their death, but would avoid any estate tax at the time of their death, no matter how large the trust may have grown.  

In addition to the lifetime gift and estate tax exemptions mentioned above, taxpayers are still allowed to give, tax-free, up to $14,000 to as many different individuals as they would like during the tax year.  This is known as the annual gift tax exclusion.  Gifts made in an amount at or less than the annual gift tax exclusion are not applied against your lifetime gift exemption.  There is even greater flexibility applied for gifts used to fund 529 college savings plans, allowing you to use up to five years of annual gifts ($14,000 x 5 = $70,000) at one time to fund a plan.  Caveat: Since this gift would be greater than $14,000 in any one year, you will need to file a gift tax return – however, as long as no other gifts are made to the child benefiting from the plan over those 5 years, no gift tax would be owed.  One planning point that we share with our clients to help them avoid any red flags, is to make any annual gift check for less than the $14,000 amount, in consideration of the fact that you may be giving the recipient other gifts that year, for birthdays, holidays, graduations, or other celebrations. 

With the federal estate tax exemption at the highest level in history, many people may not feel the need to make annual gifts to lower their estate value.  However, you should consider whether or not your individual state may have estate taxes that would be charged to your estate, or if there are other reasons to make lifetime gifts, or establish trusts for the benefit and protection of your heirs. 

As always, to ensure that you are making proper planning decisions that are appropriate for you and your family members, you should schedule a consultation with one of our trusted advisors. 

Caldwell Trust Company

Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.