Maximizing the Potential of Annual Gifts

If you’re like most individuals, you’ve probably worked a lifetime to build your own American dream—an adequate nest egg, a comfortable home, and an array of other assets. Then, at one point or another, you may realize that your finances could create unfavorable estate tax consequences. So, you take care of the compulsory legal documents—wills, trusts, etc.—and learn along the way that giving away assets may help reduce the size of your taxable estate. Even though many individuals make occasional gifts to their children or other family members, few actually take advantage of the benefits offered through a regular gifting program.

Gifting Made Simple

Current tax laws allow you to give away $14,000 ($28,000 if married) in 2017 to as many people as you wish without incurring any gift taxes. This $14,000 annual gift tax exclusion can be an effective means for gradually passing wealth to future generations. In fact, systematically making such a gift can create a rather sizable long-term result.

Consider this hypothetical example: Suppose 60-year-old Joseph starts a gifting program for his newborn grandson, Alex. Each year, Joseph makes a gift of $14,000. After 25 years, Alex will have accumulated $350,000, assuming 0% growth. In addition, suppose Joseph’s wife Helen, also age 60, also chooses to make a $14,000 gift to Alex, bringing the total annual gift to $28,000. In this case, Alex will have accumulated $700,000 in 25 years (assuming 0% growth). With this win-win scenario, Joseph and Helen help Alex accrue a nest egg, while, at the same time, lowering the value of their estate. This strategy will help Joseph and Helen minimize their estate tax liabilities.

One Step Beyond

Using the annual gift tax exclusion to fund a life insurance policy creates the potential to turn gifts into a substantial death benefit. For instance, take another look at Joseph. Suppose Joseph (the donor) sets up an irrevocable life insurance trust (ILIT) for the benefit of Alex. The ILIT then purchases life insurance on Joseph. Upon Joseph’s death, the life insurance death benefit proceeds are payable to the ILIT. Since the policy is owned by and payable to the ILIT, there are no transfer tax consequences to Joseph’s estate.

Life insurance may provide an ideal mechanism for leveraging annual gifts. In the short term, it offers an immediate death benefit that generally outweighs the total premium outlay (gifts). While over the long term, life insurance offers a unique opportunity to potentially leverage annual gifts into a significant benefit for selected beneficiaries. This can be achieved by taking advantage of the tax-deferred buildup of policy values, which in some cases may indirectly increase the life insurance policy’s death benefit over time.

The use of a regular gifting program may be advantageous to individuals seeking to gradually reduce the size of their estates. In addition, it affords these individuals the opportunity to pass wealth to children, family members, and others with reduced tax consequences.



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