If leaving a legacy is part of your financial plan, you want to consider options that can put as much of your estate as possible into the hands of the people and organizations you choose as beneficiaries. In addition to a few standard deductions, such as the marital deduction and unified credit strategies, you can also reduce your taxable estate through gifting.
Estate gifting takes two forms: lifetime transfers to individuals and charitable gifts to organizations. Each has its own advantages.
Lifetime transfers
Lifetime transfers are gifts of property (including money) that you make from your estate to one or more individuals during your lifetime. Taxes on a gift are usually paid by either you or the recipient at the time you make the gift and are taxed at the same tax rates applied to estates. Although the value of all the gifts you made during your lifetime is added back to your estate at death, the amount of any gift tax you paid becomes a credit against the resulting estate tax.
One of the advantages of gifting is that Federal law provides an annual exclusion (currently up to $15,000) to an unlimited number of recipients without incurring gift tax. This annual exclusion provides an effective method of transferring property to heirs, while reducing future estate tax liability.
Another advantage of making lifetime gifts is that only the value of the gift at the time of gift is included in your estate. Any appreciation in value of the gifted property (from time of gift to time of death) is excluded from your estate.
See the IRS’s FAQs on Gift Taxes for information about tax rates, exclusions, and more.
Charitable gifts
Gifts you make to qualified charitable organizations are deductible from your gross estate for estate tax purposes. The charitable gift deduction is unlimited and available for gifts made to qualified charitable, religious, educational or scientific organization -- or to any political subdivision of the U.S. government.
Charitable gifts of partial interests in property (or property you jointly own with someone) are generally not deductible. However, charitable remainder trusts are one exception to this rule.
Charitable remainder trusts are set up to disperse income to an individual, at least annually, over a set period of time. After that time has passed, the remainder of the trust goes to the specified charity. So, for instance, you can structure a charitable trust to provide a lifetime income to yourself or another beneficiary, then a donation of the remaining trust property to a charity at death. The actuarial value of this "remainder" amount is eligible for a federal income tax charitable deduction when you establish the trust and for a federal estate tax charitable deduction at time of your death.
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