The guidelines surrounding giving away assets without incurring taxes are regularly misunderstood or simply not accounted for when creating an estate plan. Unfortunately, this error often leads to hefty unnecessary taxation when the owner of an estate passes away.
Under the unified credit system, an individual is allowed to give away up to $675,000 worth of assets within his or her lifetime without incurring federal estate taxes or gift taxes. This is in addition to the annual gift exemption, which fluctuates near $10,000 per year. Unfortunately, the unified credit system often does not get accounted for in estate planning, resulting in mixed opportunities to save and protect assets.
In broad strokes, this means that you can give away assets in your lifetime and after you pass without facing estate or gift taxes, which begin at a steep 37 percent and start climbing. If you give away assets worth about $200,000 in your lifetime, and upon your passing have assets worth about $600,000 to your name, then you can transfer another $475,000 to others before gift and estate taxes kick in.
If you have assets that exceed this threshold, it is important to create a very specific and detailed estate plan that uses estate planning tools to remove assets from your personal ownership, to reduce the value of your estate and protect your assets from harsh taxation. With proper legal guidance, you can use the strength of the law to your advantage and ensure that a larger portion of your assets go to your beneficiaries. Your beneficiaries will be grateful you did.
Source: Findlaw, "Common Estate Planning Mistakes," accessed Aug. 11, 2017