Minimizing Estate Taxes: Gifting to Heirs


Marvin Appel Image Marvin Appel President, Signalert Asset Management LLC

In the first decade of the new millennium, many Americans escaped the grip of estate and gift taxes as the government raised the amount of money you could leave without owing taxes. Now, if your property totals less than $5.45 million you are not subject to federal estate taxes. (This number increases with inflation.)

However, there are fifteen states (and also the District of Columbia) that impose state-level estate taxes, many at lower limits than the federal. New Jersey is the least generous, exempting only the first $675,000 from estate taxes. New York State taxes every dollar of your estate if it exceeds the threshold (currently $4.1875 million).

Estate taxes can be very steep. The top federal estate tax rate is 40%, and if you live in New York State, you will have to pay a top 16% state tax rate on top of that. (The state tax is a deduction from the federal tax, so the combined top tax rate is 49.6%.)

Given tax rates this high, it can be useful to shrink your estate in ways that accomplish your legacy goals. One such strategy is gifting to charity, either in your will or before you die. Here, however, we will discuss making gifts to your intended heirs before you pass away.

Why lifetime gifting can reduce your estate tax burden

Compare two scenarios for someone who would be subject to the maximum federal estate tax rate. First, let's say she wants to bequeath $1,000 (above the exemption amount). Her estate will have to have $1,666.67: After subtracting the 40% estate tax bill from $1,666.67, $1,000 will remain for the heirs.

Suppose instead that this wealthy and generous person decided to give away $1,000 while she still lives.