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Making a lifetime gift is often the most effective way to reduce estate taxation. However, this technique is often overlooked. Economic necessity will temper one's willingness or ability to make significant lifetime transfers of wealth. It is common practice in the design of a financial plan to model the asset base and cash flow requirements of a potential donor before making significant gifts. This is a simple, but practical step used to assure the donor that he or she can afford to give up control of the assets.
Gifts can be made outright or in trust. Many of the techniques that follow involve some form of gifting. The basic benefits of gifting include:
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Shifting the income and growth of an asset out of a higher income tax bracket;
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Shifting growth out of a high estate tax bracket; and
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Tax leverage. Even though the estate and gift tax rates are the same, the calculation process favors lifetime transfers (see the table below).
| THE TAX TRANSFER SYSTEM |
Comparison of Gift and Estate Taxes
Total value of assets available: $6,000,000 |
| Gift Tax* |
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| Tax base: net value of assets transferred |
$4,000,000 |
| Gift tax: (tax rate) X (tax base) |
$2,000,000 |
| Net transfer to donee: (total assets) — (tax) |
$4,000,000 |
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| Estate Tax* |
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| Tax base: total value of assets available |
$6,000,000 |
| Estate tax: (tax rate) X (tax base) |
$3,000,000 |
| Net transfer to heirs:(total assets) — (tax) |
$3,000,000 |
| *Assume Gift/Estate Tax Rate of 50% |
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