Many people want to help out family members while they are alive while at the same time wanting to reduce the size of their estate. The easiest way to do this is to give $13,000 per person to as many people as you want. Thus a couple can give $26,000 per year to a person. For most people, a few years of doing that be more than enough to decrease the chance of estate taxes.

There are some people with significant wealth. They have to engage in more “sophisticated” estate planning. While it does not sound that sophisticated, they may wish to give larger gifts. In addition to the $13,000 annual gifts, an individual can give away $1,000,000 over his or her lifetime without incurring a gift tax. By getting money out of the estate, the growth of that money is not subject to estate tax.

What about for very wealthy people? Are gifts still a good thing? Many would argue yes. Currently our gift tax rate of 35% is the lowest it has been since 1934 when it was 33.5%. Next year the rate will be 55% unless a new law is passed. Therefore, if someone wants to give away $1,000,000 (and has already used up his $1,000,000 lifetime amount) he would have to pay $350,000 to the federal government. On the other hand, if he leaves the amount in his estate and dies with a taxable estate and the estate tax rate is at 55% as it is set to be in 2011, then it will take over $2,000,000 to get his heirs $1,000,0000. In other words, it makes a lot of sense to gift the money now.

However, many very wealthy are not doing this. For some, the idea of paying any taxes to Uncle Sam goes against the grain. They believe in avoiding taxes or deferring them. Many have been able to do that with their income taxes. For others, giving away a large amount of money is worrisome. Many are scared they will run out of money.

I tell all of my clients that come to my office for trusts, wills, asset protection, and sophisticated estate planning to think about gifting. It is a powerful tool!