Go Back

7 Major Errors in Estate Planning* – Part 5 of 7

A recent article in Forbes listed one author’s opinion of the 7 Major Errors in Estate Planning

The 7 Major Errors were listed as:

  1. Not Having a Plan
  2. Online or DIY Rather Than Professionals
  3. Failure to Review Beneficiary Designations or Titling of Assets
  4. Failure to Consider the Estate and Gift Tax Consequences of Life Insurance
  5. Maximizing Annual Gifts
  6. Failure to Tax Advantage of the Estate Tax Exemption in 2012
  7. Leaving Assets outright to Adult Children

As we continue to discuss each of the 7 major errors in estate planning, I am up again for number 5.

5. Maximizing Annual Gifts

Under current tax laws, the annual gift tax exclusion allows each individual to gift $13,000 per year to an unlimited number of persons without any estate or gift tax consequences.  As a result, the utilization/use of the annual gift tax exclusion is a way to transfer assets to the next generation without being subject to any gift or estate tax.  For example, a married couple with 5 children can gift $26,000 per year ($13,000 per parent) to each child free of estate or gift taxes.  The result is that each year the married couple has transferred $130,000 out of their estate to the next generation.  Over a period of 10 years, the couple will have transferred $1,300,000 tax free.

Many clients express concern about gifting thousands of dollars each year to their minor (or adult) children as the funds could be squandered.  Fortunately, there are several planning tools that can be implemented to protect the beneficiaries while allowing the parent to retain some control.

The annual gift tax exclusion can also be used to purchase life insurance policies.  If structured properly, the policy’s premiums can be paid with the annual exclusion amount and the proceeds pass to beneficiaries free of estate and gift taxes. 

We have seen a decrease in the use of the annual gift tax exclusion over the past few years as a result of the increased estate and gift tax exemption in recent years.  However, if Congress fails to intervene, the estate and gift tax exemption will return to $1 million dollars as of January 1, 2013.  This pending change in tax law may result in new appreciation for annual gifting techniques.

Overall, the annual gift tax exclusion is a great way to transfer wealth to the next generation without paying any estate or gift taxes.  Should you have any questions regarding the proper use of the annual gift tax exclusion, feel free to contact our office with your questions.   

Attorney - Corey Schmutz