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A Case Study: Giving Wealth Away

Bob and Regina Schuyler, both in their 60s, own assets currently valued at more than $15.5 million. They figure that’s much more than they’ll need during the rest of their lives, so they’re exploring ways to pass on some of their wealth to their loved ones while avoiding major tax consequences.

The answer for effectively transferring their assets may be relatively simple: They can give them away.

That’s not to say that the Schuylers wouldn’t benefit from sophisticated planning techniques such as establishing an “intentionally defective trust,” or IDT, that could provide income tax savings for their family or a “dynasty trust” to create a lasting legacy. But those are actually complex variations on the basic theme of giving property to other family members. Most trusts and other wealth-transfer vehicles are merely ways to maximize the value of two tax breaks—the annual gift tax exclusion and the lifetime gift tax exemption.

Under the provisions of the annual gift tax exclusion, you can give away property worth as much as $14,000 to as many recipients as you choose without any federal gift tax liability. The maximum exclusion is doubled to $2,800 per recipient for joint gifts by a married couple. Furthermore, you could also help family members by paying tuition or medical expenses on their behalf without tax liability and those payments don’t count against the annual exclusion.

The lifetime gift tax exemption complements the annual exclusion. Recent legislation increased the value of the exemption to a generous $5 million (indexed to $5.49 million in 2017) and permits "portability" of exemptions between spouses.  Under a unified gift and estate tax system, any of the exemption you utilize during your lifetime will reduce the amount that can be used to shelter assets from estate taxes when you die.)

Therefore, it may be advantageous to make substantial gifts under the current favorable rules.

Suppose the Schuylers give each of their three adult children and seven grandchildren $28,000 in 2017 and 2018. The total gifts of $560,000 ($28,000 x 2 years x 10 recipients) are covered by the annual gift tax exclusion. In addition, they could use the maximum $10 million gift tax exemption ($10.98 million in 2017) for a couple to shelter gifts to the three children. Thus, they can transfer well over $11 million free of gift tax, leaving them with more than $4 million. And the value of those gifts will be out of their taxable estates forever.

Again, smart tax planning for wealthy families may also include other, more sophisticated approaches. But this hypothetical example illustrates the fact that even the simplest strategies can make a major impact.