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Get the most out of your year-end gift and estate tax planning

By John S. Lueken
Bingham Greenebaum Doll LLP

The end of each year inevitably brings a flurry of activity for everyone. But in the midst of the hustle and bustle, don’t forget to take advantage of the current tax breaks offered under estate and gift planning laws. If you miss these opportunities, they may not present themselves again!

Tax-free annual exclusion gifts

One of the remaining tax breaks in the estate and gift tax system is your right to make gifts of $14,000 to any number of donees ($28,000 apiece if you are married) free of transfer tax this year. Making these gifts is a great way to reduce your estate and avoid death taxes. Each year that goes by without making these gifts is a lost opportunity and a gift to Uncle Sam. Use it by the end of December – and again in January – or lose it!

The new laws which were made “permanent” in 2013 include a unified top estate and gift tax rate of 40 percent for estates and gifts in excess of $5.25 million in 2013 (increasing to $5.34 million in 2014). Given the roller coaster history of the estate and gift tax structure, many clients conclude that it makes sense to continue their annual gifting program even in this new age of “exemption permanence.”

This annual gifting opportunity is a tremendous tax break. For example, a taxpayer and spouse with three children (each with a spouse) and three grandchildren can make annual tax-free gifts of $252,000 (nine persons at $28,000 each). Assuming a 40 percent estate tax rate will apply at the death of the survivor of the taxpayer and spouse, that can mean future tax savings of almost $101,000 — per year. Missing this chance could mean that those tax savings will evaporate, and all those funds will wind up with the Internal Revenue Service – not with your family – at your death.

Tax-free lifetime exemption gifts

If you make gifts in excess of the annual exclusion amounts, you will use some of your lifetime unified estate and gift tax exemption. However, the sooner you use it, the more income and appreciation that can pass tax-free to your family in the future. This is especially true as the stock market continues to reach new heights.

Making your gifts in trust

Not comfortable making outright gifts of $14,000 or of your $5.25 million exemption to your loved ones? Put the gifts in a Crummey Trust (a.k.a. a Gift Trust) instead.

A Crummey Trust can be designed so that you can take advantage of your annual exclusion gifts and still leave your family with access and control. Crummey Trusts, named after the landmark case in this area, provide that each designated beneficiary has a right this year to withdraw his or her $14,000 (or $28,000 if you are married) share of the gift during a specified period of time (e.g., 30 days). Once the period ends, the withdrawal right lapses and the gift is subject to the terms of the trust.

If your family needs access to the trust funds, the trust income and assets are available. If the family does not need them, let them grow and remain sheltered. If you already have a Crummey Trust, have you made your gifts yet this year? Also, have you notified your beneficiaries that they have limited rights of withdrawal? This is essential to qualify these gifts for the annual exclusion and make them tax free.

If you have a family business or real estate, these assets can be gifted instead of cash or publicly traded securities. In many cases, these assets can be used for gifting in ways that avoid giving away access or control. What could be better than controlling the business or realty, retaining your cash and saving estate and gift taxes to boot?

Have you been putting off updating your estate plan?

Year-end is the perfect time to reflect back over the past year. Make sure that those estate planning matters that you resolved to address in your 2013 New Year’s resolutions do not become your 2014 New Year’s resolutions. Perhaps you have had a change in your family situation, health or wealth during the past year that impacts your estate plan. Maybe you want to ascertain the impact of the ever-changing estate and inheritance tax laws on your existing estate plan. Whatever the reason, year-end is the ideal time to make good on your resolution.

If you have a family limited partnership or limited liability company, year-end is a perfect time to hold your annual meeting and update your annual minutes. Remember, the IRS will not respect the entity unless you do.

With these matters out of the way, you are then set to enjoy the holidays!

If you have questions about amending your estate plan or making year-end gifts, you may contact a member of Bingham Greenebaum Doll LLP’s Estate Planning Practice Group.

John S. Lueken is an attorney with Bingham Greenbaum Doll.