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Financial Planning > Tax Planning

Wealth Transfer Planning Helps Minimize Taxes And Maximize Gifts

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For individuals looking to minimize their taxes and maximize their gifts to their heirs or loved ones, lifetime wealth transfer planning may be the answer. Lifetime wealth transfer is, in essence, the strategic transfer of assets to selected beneficiaries–presumably children, grandchildren and/or charities–in a manner that reduces or eliminates transfer taxes, such as gift, generation-skipping and estate taxes.

The simplest and most efficient form of wealth transfer to heirs is the $12,000 per donee annual exclusion. This annual exclusion enables a donor to make a gift of $12,000 to an individual each year without triggering any transfer tax. The following example illustrates why this is a powerful wealth transfer tool.

Say an individual makes the maximum $12,000 gift to three children for 10 years. By doing so, he will have removed $360,000 from his estate, and the resulting estate tax savings equal approximately $150,000, assuming the $360,000 would be fully taxable. And if the individual is married, the annual exclusion amount doubles because each spouse can gift $12,000 to each donee–or elect to split gifts if the assets being gifted are owned by only one spouse.

An individual can also make unlimited gifts for the medical care or education of a beneficiary, as long as that payment is made directly to the healthcare provider or the educational institution. Moreover, under a recent IRS ruling, an individual can pre-pay education costs.

So a grandparent could, for example, pay $100,000 to cover 4 years of private school education for a grandchild without any gift, generation-skipping or estate tax consequences. That amount–or any amount paid directly to a school for such education–would be entirely ignored for wealth transfer tax purposes. For very wealthy individuals, this is a great opportunity to transfer wealth, completely free of the usual gift and estate tax exemption constraints, for the benefit of children and grandchildren, or any other desired beneficiary.

Another common lifetime wealth transfer option is to have life insurance held by a trust. By coupling trust-owned life insurance with tax-efficient gifts in the form of premiums paid to the trust, an individual can remove wealth from his estate while living and keep life insurance proceeds out of his taxable estate.

Without such planning, the individual’s estate will increase due to the retention of the life insurance premium (plus investment earnings on such amount). And Uncle Sam, in the form of additional estate tax due, will become about a 50% partner in life insurance proceeds that were purchased to benefit family and other beneficiaries.

Even making taxable gifts while living is preferable to paying estate tax on the same amount, because the gift tax is imposed on a tax-exclusive basis and the estate tax is on a tax-inclusive basis. For example, the gift tax on a $100,000 gift would be $45,000, assuming a 45% unified gift and estate tax rate. Thus, the same amount will be subject to tax at 45% whether transferred as a gift or left under a will. By making the gift, the individual will have effectively removed $145,000 from his estate, because both the $100,000 gift and the $45,000 in tax have been transferred out.

However, if the same individual dies holding $145,000–again assuming a 45% tax rate–the estate tax levied will be $65,250, or 45% of $145,000. This means that while starting with $145,000 in both cases, the gift would result in the beneficiary receiving $100,000, while the testamentary bequest would result in the beneficiary receiving just $79,750.

And by making the gift, all future growth on the asset will not be included in the donor’s estate, making this technique even more powerful. While it may be difficult to convince an individual to pay any tax before absolutely required, the economics here prove the benefit of making gifts and paying lower taxes as a result.

Robert Fishbein is vice president and corporate counsel in the tax department of Prudential Financial, Newark, N.J. You can e-mail him at


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