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1. **Reducing Estate Taxes with Lifetime Gifts:** Giving away assets during your lifetime can lower or even avoid federal estate taxes. Here's how:
- **$15,000 Annual Exclusion:** Each person can give up to $15,000 a year per person without facing gift taxes or needing to file a gift tax return. For example, a couple with two children can give up to $60,000 a year without tax consequences.
- **Unlimited Exclusion for Educational and Medical Expenses:** Payments made directly to institutions for someone's tuition or medical expenses do not count towards your gift limit.
- **Applicable Exclusion Amount:** Each person has a large exemption amount ($11.18 million in 2018, reducing after 2025) that they can use during their lifetime or at death, over and above the annual exclusions.
- **Gift-Splitting Between Spouses:** Couples can share the gift-giving, allowing them to double the annual exclusion by treating the gift as if it were given half by each spouse.
- **Post-Gift Appreciation Is Not Taxed:** Any increase in the value of gifts after they are given does not face estate or gift taxes.
2. **Benefits of a Lifetime Gift Program:** Regular gifts using the annual exclusion can reduce your taxable estate significantly, potentially saving hundreds of thousands in estate taxes.
3. **Ensuring Wise Use of Gifts:** While tax benefits are significant, the worry that children may misuse gifts is common. Protect against this by:
- Making the gift to a custodial account under state laws where you control the assets until the child is older (up to 25 years).
- Using trusts or education savings plans where you can set terms on how and when the money is used.
4. **Advanced Strategies:**
- **Gift Trusts:** Allow more control over gifts, protecting them from the recipient's poor decisions or creditors.
- **Family Limited Partnerships:** You can gift shares of a family business, often at a reduced value due to marketability and control discounts.
5. **When Not to Gift:** Don’t gift assets you might need later, or that have low tax basis unless to a grantor trust, which might still benefit from your paying the taxes on the trust's income.
6. **Choosing Trustees and Trust Terms:** You can't be trustee of your own irrevocable trust but you can appoint someone you trust, or use a professional trustee for larger trusts.
7. **Leveraging Your Gifts:** Using trusts and other arrangements, you can make larger gifts or retain an income while still removing assets from your estate. This needs careful legal planning to get right.
By understanding and using these methods wisely, you can significantly reduce the taxes on your estate while ensuring your wealth supports your children, grandchildren, and beyond in meaningful ways.
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