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    Add as FriendGift and Estate Tax Basics

    by: Robert

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    1 : Gift and estate tax basics
    2 : Tax Avoidance Strategies
    3 : Estate Planning Goals
    4 : One common goal of estate planning is tax avoidance
    5 : To understand why tax avoidance strategies are commonly employed in estate planning you need to understand how gift and estate taxes work first
    6 : What Is the Gift and Estate Tax
    7 : All gifts made during your lifetime, as well as all assets owned by you at the time of death, are potentially subject to gift and estate taxes
    8 : Anything you give away for which you do not receive full consideration in return is a gift Certain types of gifts are excluded Because of the lifetime exemption and yearly exclusion most gifts of small value are not actually taxed Value of lifetime gifts plus value of assets owned at death are added together and then potentially taxed
    9 : Gift and Estate Tax Rate
    10 : Historically fluctuated every few years American Taxpayer Relief Act of 2013, or ATRA, permanently set the gift and estate tax rate at a maximum of 40 percent
    11 : Unlimited Marital Deduction
    12 : The unlimited marital deduction allows a taxpayer to transfer assets of unlimited value to a spouse during the taxpayers’ lifetime or at the time of death without incurring gift and estate taxes
    13 : For illustration purposes, imagine that Thomas and Ellen are married at the time of Ellen’s death on January 1st, 2014 Ellen owned assets valued at $5 million when she died and made a total of $2 million worth of qualifying gifts during her lifetime Thomas also owns $5 million in assets
    14 : Ellen can leave all of the assets she owned at the time of her death to Thomas without Ellen’s estate having to worry about gift and estate taxes Thomas’s estate may be overfunded though after the gift
    15 : The Lifetime Exemption
    16 : Each taxpayer is entitled to exempt a specific amount of gifts and assets over the course of a lifetime from gift and estate taxes
    17 : Lifetime exemption has fluctuated wildly over the years ATRA set it at $5 million, adjusted for inflation each year Exemption amount is $5.34 million for 2014
    18 : Thomas now has an estate valued at $10 million $4.66 million would be taxed at 40 percent Thomas’s estate would owe $1,864,000 in estate taxes
    19 : Portability
    20 : ATRA also made the concept of portability permanent Allows taxpayer to use any unused portion of a spouse’s lifetime exemption Thomas could exempt an additional $3.34 million by using Ellen’s unused exemption
    21 : Thomas cannot use the full $5.34 million because Ellen made lifetime gifts valued at $2 million Brings Thomas’s taxable estate down to just $1.32 million Brings the tax liability down from $1,864,000 to just $528,000
    22 : The Annual Exclusion
    23 : The annual exclusion allows each taxpayer to make gifts valued at up to $14,000 (for 2014) to as many beneficiaries as the taxpayer wishes each year without incurring a gift tax
    24 : Married couples can combine gifts (gift-splitting) to gift assets valued at up to $28,000
    25 : Annual Exclusion gifts do not count toward the LIFETIME EXEMPTION LIMIT
    26 : Assume Thomas lives an additional ten years Assume Thomas used the annual exclusion to make yearly gifts to the couple’s three children and five grandchildren Thomas could annually gift $112,000 for a total of $1.12 million tax-free Brings his taxable estate down to just $200,000
    27 : Tax obligation is now just $80,000
    28 : By employing gift and estate tax avoidance strategies the amount of tax due on Thomas’s estate was reduced from $1,864,000 to $80,000, a savings of $1,784,000 – money that will go to Thomas and Ellen’s loved ones instead of to the IRS
    29 : Had they started earlier they might have been able to avoid gift and estate taxes entirely
    31 : Click to visit: 445 US Highway 6 East, Geneseo, IL 61254 Phone: (309) 944-2188 5030 38th Street, Suite 2, Moline, IL 61265 Phone: (309) 762-9368

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