With the holiday season here, many people are thinking about estate planning and making year-end gifts to family members. Last year, taxpayers scrambled to make last-minute asset transfers in case the historically generous gift and estate tax exemptions expired or rates skyrocketed. This year, taxpayers face a calmer estate planning landscape because Congress passed a relatively generous federal gift and estate tax regime.

Passing Your  Assets to the Family

Most people want their assets to pass to family members when they die. Spouses can transfer assets back and forth without incurring gift or estate taxes, as long as both are U.S. citizens. But if you want your non-citizen spouse, children, grandchildren, or extended family and friends to inherit your estate, they might have to pay taxes.

In 2013, you can transfer as much as $5.25 million of assets without incurring federal gift, estate, or generation skipping transfer (GST) tax. That doesn’t include the annual gift tax exclusion of $14,000 per year per donor and recipient. Estate tax is calculated on the net value of the decedent’s assets as of the date of death, or on the alternate valuation date, which is six months later. A 40% tax rate applies to the value of an estate in excess of the $5.25 million exemption.

Part of your estate plan is figuring out the optimal tools to use and timing of transfers to minimize taxes. Start by inventorying your personal assets, which may include:

  • Cash and investments;
  • Retirement accounts;
  • Your personal residence, vacation home, and other real estate;
  • Private business ownership interests;
  • Life insurance (including any death proceeds);
  • Automobiles; and
  • Personal assets, such as artwork, jewelry, and collectibles.

Then, subtract any liabilities you owe and amounts you plan to transfer to charities or your spouse. The result is your net taxable estate. If you’re married, prepare a similar list for your spouse.

Next, designate the preferred recipient of each asset. To illustrate, suppose you have twin sons and two major assets, an auto dealership and a rental property. You might transfer the dealership stock to the son who works as the service manager there. His brother, who isn’t involved in the dealership, can inherit the rental property.

Planning Tools

Outright transfers are simple and flexible. However, you can no longer control what the recipient does with the assets. Trusts are more complex, but they can be useful when heirs are immature or lack asset management capabilities. They can also help save taxes and protect assets from creditors.

Many other estate planning tools, such as qualified terminable interest property (QTIP) trusts, Crummey trusts, and family limited partnerships, can be used to minimize tax. They may also achieve other estate planning objectives, such as professional asset management, protection against creditors’ claims, and preservation of the portability provision in generation-skipping transfers and remarriages.

Another way to reduce your taxable estate is with the annual gift tax exclusion. Each individual is entitled to give as much as $14,000 (up from $13,000 in 2012) per year per recipient without any gift tax consequences or using any of his or her gift, estate, or GST tax exemption amount ($5.25 million for 2013).

That means a married couple can gift $56,000 to their son and daughter-in-law ($28,000 combined times two recipients). You can also pay unlimited medical and tuition expenses on behalf of family members, without incurring gift tax, if you pay the bills directly to providers. Tuition for any child, even certain preschools, may qualify.


Asset valuations are an important part of estate planning. The value of cash and investment accounts is readily available. But valuing less marketable assets, such as fractional interests in real estate, private business interests, stock options, and patents, requires input from a credentialed appraisal professional.

Often these assets are subject to discounts for lack of control and marketability that only a qualified valuation pro knows how to quantify. If your estate includes these assets, you may need to hire a valuator to prepare a written appraisal to support gift and estate tax returns.

It’s important to monitor the value of your estate before you die. Determining the value of the individual components also can help ensure that your asset allocations to family members are equitable, and that you’re not favoring one heir over another.

Asset values also fluctuate over time, so update appraisals regularly to ensure your estate plan continues to make sense.

Beware of Inheritance Tax

Quite a few states impose estate or inheritance tax at a lower threshold than the federal government does. So it’s important to understand the rules in your state to avoid an unexpected tax liability or other unintended consequences of an asset transfer.

For example, in New York, the state estate tax exemption is $1 million per individual. Any assets transferred beyond the exemption are subject to an estate tax of up to 16%. Suppose a wealthy New York couple died in 2013, leaving their estate worth $10 million to their children. They would incur no federal estate tax (assuming they had not used any of their unified federal gift and estate tax exemptions during their lives). But the couple’s estate would owe state-level estate taxes on $8 million — the amount that the taxable estate exceeded the state exemption.

Think About Philanthropy

Charities provide another outlet for sharing your wealth, and direct bequests to charities can also reduce your estate tax bill. Moreover, qualified charitable donations made during your lifetime generally qualify for income tax deductions.

You can create trusts to achieve your philanthropic objectives, while also minimizing taxes. For example, a charitable remainder trust (CRT) pays income to you or your beneficiaries for a prescribed time. At the end of that period, the remaining trust assets pass to your favorite charitable organization(s).

Alternatively, you might prefer a trust do the reverse, provide an income for a favorite charity over a set period, with the remainder passing to your beneficiaries after the trust expires. In that case, you need a charitable lead trust (CLT).

Seek Professional Advice

Estate planning is an ongoing process with many options and nuances. Congress could pass estate tax law changes in the future that would alter the current exemptions and tax rates — or even repeal the estate tax altogether. So it’s important to be prepared for a variety of scenarios. Consult with your estate planning adviser.