What will happen to the estate and gift-tax laws in the next few months? At this point, it’s anyone’s guess.
Strategy: Focus on what you know now. Emphasize those estate-planning techniques that would seem to make sense no matter which way the wind blows.
For instance, if you’ve started a lifetime gift-giving program, continue it. It’s likely that the estate tax will ultimately survive, in one form or another, so reducing your taxable estate through gifts can’t hurt. But watch out for potential traps for “deathbed gifts” (see box below).
Here’s the whole story: Under the monumental Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate-tax exemption equivalent has gradually increased, topping out at $3.5 million this year. The tax is scheduled to be repealed completely in 2010, only to return in 2011 with just a $1 million exemption.
Despite the pending changes, the annual gift-tax exclusion has been preserved. Currently, there is no gift tax imposed on a gift of up to $13,000 per recipient ($26,000 for joint gifts by a married couple). The limit is indexed for inflation.
Example: You and your spouse have three adult children and seven grandchildren. If you give each child and grandchild the maximum $13,000 this year and your spouse does the same, you can transfer $260,000 ($26,000 x 10) free of gift tax. By systematically using this technique, you’ll reduce your joint taxable estate by $1.3 million ($260,000 x 5) in just five years.
Furthermore, an individual can also use a lifetime gift-tax exemption of $1 million to shelter gifts above the annual gift-tax exclusion. But using your gift-tax exemption also reduces the available estate-tax exemption.
Tip: Remember that estate taxes are only part of the equation. For instance, if you give gifts to minors, it could result in future “kiddie tax” complications.
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