A lifetime gifting program allows you to avoid gift, estate and generation-skipping transfer tax on transferred assets. Under the Internal Revenue, Code, you can transfer up to $13,000 per year, per person, to anyone without incurring gift tax or generation-skipping transfer tax. A married couple can give twice that amount, or $26,000 per person, per year. With a lifetime giving program, you transfer this amount annually to the individuals of your choice, typically children, grandchildren and other close family members.
For example, if you give $13,000 per year to two beneficiaries for five years, you will have removed nearly $1550,000 from your estate for estate tax purposes (assuming these assets would have grown at 6%). After 10 years, you will have removed more than $365,000 and $1.5 million after 25 years. Not surprisingly, the amount removed from your estate is increased significantly with each additional $13,000 beneficiary.
The value of the lifetime giving strategy is substantially enhanced when the transferred assets are discounted in value. Lack of marketability and minority interest valuation discounts on the family limited liability company, established by a competent and experienced appraiser, allow you to leverage the gifts so that larger transfers of assets may be made. Thus, a gift which would be limited to $13,000 if made in cash increases to $21,667 if made with limited liability company interests at a 40% discount. Applying these discounts, a married couple will be able to transfer approximately $43,000 per beneficiary per year, or $430,000 over ten years, excluding growth.
Annual exclusion gifts can also be used to shield transfers to an irrevocable trust from gift and generationskipping transfer tax. The beneficiary must have the right to withdraw up to $13,000 of the transferred funds, but if that right is not exercised, the gifted funds can then be used to purchase life insurance on the life of the transferor or for other investments. This trust can be a multigenerational estate tax exempt trust or it can become a family “bank” for: (1) education; (2) business acquisitions; or (3) home purchases, among other things.
Medical care and tuition paid to assist family members or any other individual may be made in addition to the annual exclusion gifts. As long as the gifts are made directly to the medical facility or educational institution, donors can exceed the $13,000 annual exclusion amount without imposition of gift taxes.