Estate Planning Strategies


iven the complexity of the Internal Revenue Code, many estate planning techniques can be used to lower (or eliminate) the tax burden over the course of an individual’s life. One method taxpayers can use is simply taking advantage of lifetime-giving opportunities through the annual exclusion amount, the applicable estate and gift tax exclusion and taxable gifts.

Lifetime-giving techniques can work for all taxpayers, but are probably best for those with small estates as they can avoid the costs often associated with more sophisticated planning. These strategies can also significantly benefit high-net-worth clients, especially if combined with other (more involved) planning.


Every taxpayer may transfer up to $10,000 each year to any donee, free of estate and gift taxes; these amounts are not counted against the applicable exclusion amount. There is no limit on the number of permissible donees; a taxpayer can give as many of these gifts as he or she wishes. (Note: The annual exclusion amount is indexed annually for inflation, but only in increments of $1,000. It did not change for 2000 and 2001.)

In general, a married couple can elect to treat a gift as if each gave half, thus doubling the benefit and making it possible to give $20,000 each year without tax consequences. Note, however, that if a husband and wife elect to split gifts, this election applies to all gifts made by both spouses during the year to third parties; they cannot decide to split only the annual exclusion gifts and not others.

Valuation discounts. If taxpayers use the annual exclusion to make gifts of property other than cash (for example, real estate or an interest in a family-owned business), discounts for minority interests or for lack of marketability may be available, thereby allowing for the transfer of larger business interests. The donors would need to document these discounts and also adequately disclose them on a gift tax return.

One drawback to using these discounts is that, if the IRS challenges a gift’s discounted value and finds it to be incorrect, a portion of it could wind up being allocated against (and reducing) the lifetime exclusion amount (or could become taxable, if the total exclusion has been exceeded).

Also, if donors make such gifts each year, revaluations (which would involve certain costs and expenses) would be required annually.


In addition to the $10,000 annual exclusion, most taxpayers are entitled to an overall exclusion for the total amount of gifts made during their lives. (The benefits of this amount are phased out for certain very large estates, however.) U.S. citizens or residents can transfer up to $675,000 of property in 2001 without the imposition of estate or gift tax. This amount, formerly called the unified credit equivalent amount, increases incrementally each year. It will eventually reach $1 million by 2006.


There also may be a benefit to making taxable gifts. If a donor survives the gift date by three years, the gift tax paid will not be included in his or her estate; if the donor does not survive this three-year period, the gifts are treated as bequests. Given the current rates for gift and estate tax purposes, effective taxable gifts can result in significant overall tax savings.

Because of this three-year rule, taxable gifts work best for clients likely to outlive a transfer by at least three years. At the same time, the lost opportunity costs attributable to the gift tax that must be paid (for example, the income that could have been earned on the property) and the loss of a step-up in basis for the property transferred must be considered.

For a discussion of this and other techniques, see “Top 10 Estate Planning Strategies (Parts I and II),” by Evelyn Capassakis, in the January and February 2001 issues of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser


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