Three Ways to Reduce your Estate Tax Liability with Lifetime Gifts

Although the Tax Cuts and Jobs Act increased the federal estate tax threshold to a whopping $11.18 million for 2018, the Massachusetts estate tax threshold remains exactly where it’s been for years — at $1 million. That leaves Massachusetts families wondering how they can maximize their children’s inheritances by avoiding or reducing their estate taxes.

There is a simple solution, if you plan to pass your wealth to your children or grandchildren eventually anyway. You just have to get started right away.

Three Ways to Reduce Estate Taxes by Making Gifts During your Lifetime.

If you plan to give assets to people after you pass, you can make those gifts during your lifetime and reduce your taxable estate at the same time. Although you can give as much as you want to the charities of your choice, without any impact on your estate taxes (more technically, the gift tax), it gets trickier when you’re giving money to individuals.

Here is the simple rule:

In 2019, you can give up to $15,000 a year to individuals.

As with most rules, there are exceptions. Or, at least, some tips for maximizing those rules. Here are a few:

1. Give $15,000 a year to individuals.

If you are married, each gifting spouse can give $15,000 to each recipient. If the recipient is married, each gifting spouse can give $15,000 to the recipient’s spouse. This means that a married donor can give a couple up to $60,000 per year. Be sure to write individual checks for each $15,000 gift, and instruct the recipient to cash the check during the year it is written.

For example, Mr. and Mrs. Smith would like to give money to their daughter and her spouse, Mrs. and Mr. Jones. They would write four checks, in the following way:

1. Mr. Smith gives Mrs. Jones $15,000.
2. Mr. Smith gives Mr. Jones $15,000.
3. Mrs. Smith gives Mrs. Jones $15,000.
4. Mrs. Smith gives Mr. Jones $15,000.

See how that works? You have created a clear paper trail that spells out who gave what to whom, just in case the IRS or Mass Department of Revenue ask about it.

2. Give $75,000 to a 529 Plan every 5 years.

A 529 Plan is a tax-sheltered educational savings vehicle. IRS rules allows a donor to give up to 5 years of donations at one time. Because the current annual exclusion for gifts is $15,000, that allows donors to deposit $75,000 every 5 years.

There is a catch, however: If you die before the 5 years is up, the remaining years’ gifts are attributed to your estate. For example, if you contribute $75,000 in 2019 and die in 2020, only $30,000 is considered a lifetime gift and the remaining $45,000 is added back into the calculation of your estate.

3. Pay for medical expenses and educational expenses, with no limit.

Medical expenses must be paid directly to the healthcare provider or the insurance company — you can even pay premiums. Educational expenses must be for tuition, and must be paid directly to the educational institution — 529 Plans don’t count.

The benefit of lifetime gifts is that you have the pleasure of making the gift. The downside, however, is that you lose all control over the funds. So, if you’re concerned that you don’t have enough money for retirement, giving it away during your lifetime may not be the best plan for you.

If you would like to discuss further strategies for reducing your Massachusetts estate taxes, please reach out and we can talk about your particular situation.