Gifting programs can be extremely beneficial in reducing estate taxes. By gifting assets to heirs while living, people with larger estates can reduce their gross estate, which will in turn reduce estate taxes. If the value of assets gifted to heirs should grow, this future growth will also be removed from the estate and will further reduce taxes. Gifting is frequently used to acquire the life insurance that pays estate taxes. It is important to be careful when considering a gifting program. Even wealthy people should make sure that they leave sufficient assets to continue the lifestyle they enjoy.

Usually when life insurance is used to pay, or help pay, estate taxes, a gifting program is utilized. The most common gifting program would be the use of the annual gift exclusion. Each individual is allowed to gift up to $10,000 per person annually. That means that a husband and wife together could gift up to $20,000 per person per year. These gifts may consist of cash, real property, securities, business ownership, etc. Often, when Estate taxes are anticipated, cash is gifted to purchase life insurance in which a child or ILIT is the beneficiary.

The Unified Credit allows anyone to give up to $600,000 to someone else (usually a child or grandchild) during his or her lifetime, or at death. Larger estates often use all or part of the unified credit prior to death. The unified credit does not all have to be used at one time. For example, if you gave someone $100,000 while you were alive, your $600,000 would be reduced to $500,000. This means that at your subsequent death, only the first $500,000 would pass to heirs without estate taxes. Since any person can pass up to $600,000, a husband and a wife together can pass $1.2 million dollars to heirs (in a well planned estate) without estate taxes.

In some estates (mostly large ones), the entire unified credit is used while both spouses are alive. A husband and wife together might give $1.2 million to their heirs while they are alive. Often this amount is considerably leveraged up by using life insurance to pay a large future estate tax bill. Keep in mind that annual gifting can be used alongside the present or future use of your unified credit. Always consult a CPA before beginning a gifting program.

Additional Information on Estate Planning:

Estate Planning Overview
Irrevocable Life Insurance Trusts (ILITS)
Using Ownership and Beneficiary Designations
How to Get Existing Policies Out of my Estate
Can the Three-Year Rule be Avoided?
Second to Die Life (Survivorship) Insurance
Gifts - Overview
Leveraging Your Gifting Program
Grandchildren
Generation Skipping
Living Trusts
Credit Bypass Trust
Charitable Remainder Trusts
Avoid Capital Gains Income for life

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