Category: Newsworthy Notes

As the month of December is upon us, many of us get caught up with end of year planning. There are various techniques individuals can engage in that will ultimately serve to either eliminate or reduce their overall estate and gift taxes. Now is the time to address this planning rather than waiting until the eleventh hour.

Possibly the most common planning opportunity is to take advantage of the $14,000 annual gift. Currently, Federal estate and gift taxes are imposed on estates that exceed $5,340,000. Due to an adjustment for inflation, this amount is going up to $5,430,000 in 2015. When a person dies, his estate will be subject to a federal estate tax if the value of the estate exceeds this amount. When the estate tax return is filed, gifts that were made during the decedent’s lifetime are added to the value of what remains in his name. Accordingly, if a person dies with $4,000,000 in his estate but, during his lifetime, he had gifted $2,000,000 (as reflected on gift tax returns filed during his lifetime), his estate will be taxed because the value of his estate exceeds $5,340,000.

This issue could have been avoided if the person had taken advantage of the $14,000 annual exclusion. The annual exclusion allows individuals to gift up to $14,000 to an unlimited number of individuals in a given calendar year. These gifts do not require the filing of any gift tax return on the part of the donor. Married couples may gift up to $28,000 to each recipient, if each spouse gives the maximum amount individually (i.e., they each give $14,000) or if they agree to split joint gifts on their tax return (i.e., one gifts $28,000 and it covers both spouses’ exemption). For example, if a husband and wife have four married children and four grandchildren, they can gift a total of $336,000 in one year (12 times $28,000).

In fact, if the couple makes these gifts in December, 2014, they can also take advantage of the following year’s exemption and gift the same amount to the same recipients in January, 2015. In the course of a two month period (December, 2014 and January, 2015), the couple will have reduced their taxable estate by $672,000! Individuals with large estates can utilize these techniques to reduce the value of their estates over a period of time. Any gift made by a check will be considered complete only if it is cashed before the end of the year.

People who are interested in creating or adding to a 529 Plan for the purpose of covering a child or grandchild’s education should make sure to make a contribution before the end of the year. Another gifting strategy that many are unaware of is the ability to pay for another individual’s medical or educational expenses. If the payments are made directly to the institution, such as a university or medical facility, there is no limitation on the amount. Such a gift is not limited to the annual exclusion of $14,000 and does not count against the donors’ annual or lifetime gifting limits.

Be aware that your state may impose an additional gift or estate tax. For example, although New York State does not impose a gift tax, if a New York State resident dies with an estate that exceeds $2,062,500, an estate tax will be imposed. Accordingly, even if the federal estate is not a concern because the value of one’s assets is far less than the current $5,340,000 exemption, it would still make sense to engage in lifetime annual gifting in order to avoid New York State’s estate tax. However, in New York, certain gifts made within three years of a person’s death will be brought back into the estate.

Gifting aside, it is also important for anyone with capital gains to seek the assistance of an accountant in order to offset any gains with appropriate losses. In this regard, it is essential to consult with your financial advisor to review your portfolio, take appropriate losses, and to make sure that your assets continue to be managed in accordance with your financial goals and risk tolerance. And, finally, it is also prudent to meet with your estate planning attorney to review your will and/or trust and ancillary documents in order to make sure that they are current and reflect your wishes.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm in New York City and Long Island that exclusively concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. For contact and other information, click on Ronald A. Fatoullah in the Wellness Village.

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Updated: August 16, 2017