With so much attention focused on the future of the estate tax rate and exemption levels, it is easy to forget about other tools to save on taxes while passing on assets. Perhaps the most easily understood is the “annual gift tax exclusion.” Each New York City estate planning lawyer at our firm knows that this is a very helpful way to transfer property tax free–and it will likely remain in effect regardless of what Congress does in the future.
The exclusion exists above and beyond the estate tax exemption. It allows each taxpayer to give up to $13,000 per year to anyone tax free. Because the exemption applies to individuals, couples have two bites at the apple and are able to transfer $26,000 yearly to each individual they chose. In fact, due to inflation the annual gift exclusion level is likely to jump to near $14,000 next year according to a recent Wall Street Journal article.
Estate planning lawyers often advise that, considering the uncertainty of the federal estate tax next year, it is helpful to use the annual gift exclusion now to transfer assets beyond the reach of taxes at death. This is especially true in states like New York with state estate tax exemption levels below the federal rate. Therefore, even if one currently has an estate below the federal exemption level ($5.12 million per individual), there will be a state tax so long as the estate is above the state exemption level ($1 million).
This annual gift exclusion is just one of various other ways to pass on assets tax-free regardless of how the federal estate tax ends up. For example, the annual gift exclusion does not even count toward tuition and medical care paid for another if provided directly to the provider (instead of the individual benefitting).
On top of that, gifts can be made to a special fund known as a “529 education savings account.” The account is used for education funds for others–like children or grandchildren. However, unlike all other gifts, the one who created the account is able to withdraw the original gift amount if necessary without incurring a penalty. This means that the account truly offers little risk, because the gift can be made with applicable tax benefits while the funds can be “taken back” down the road if some situations arises and the money is needed.
The bottom line is that many options exists to pass on assets smartly. Those tools exist no matter what the federal estate tax rules. In our area, contact a New York estate planning attorney today to learn more.
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