Top 10 Rules for Estate and Gift Tax Planning

Few things are as dull and boring to the average business owner than hearing about estate and gift tax planning. If the purpose of business is to make money to provide for one’s loved ones (and favorite charitable groups), then proper estate tax and gift tax planning is one of the best ways to do that. Peter Lynch often said that “unsexy companies” like funeral homes were wildly profitable and great investments. When someone starts a business, the last thing on anyone’s mind is “How can I save on taxes when I sell the business or die?” Ranks right up there with “which nursing home should I go into?” Good estate tax and gift tax planning is far from sexy but it can save a lot of money down the road that can be better spent elsewhere than on taxes.


Most of the estate and gift tax rules are easy to understand and easy to apply (in theory). The Top 10 rules that everyone needs to know are:


  1. Each person can give $15,000 in cash or property to someone else each year and not only not incur any gift taxes but also not apply against their lifetime exemption of $11.4 million per person.

  2. If you give cash or property worth more than $15,000 in a year to any person then the amount over the $15,000 counts against the $11.4 million lifetime cap (which may drop back to $5 million per person in 2026 unless Congress changes current law). Once one hits the $11.4 million lifetime cap, one can still give the $15,000 per year per person; you can give more than the $15,000 per year but those transactions must be reported and there will be tax due starting at a 40% rate. You also have to report gifts in excess of $15,000 per person per year but there is no tax due until you hit the $11.4 million lifetime cap.

  3. If your spouse gives to the same person, a couple can give twice ($30,000 per person) and not incur any tax consequences.

  4. If you pay educational or health care expenses directly to a school or medical facility---as opposed to the person you are attempting to help---such amounts do not count against the $15,000 or $11.4 million caps. Of course, these amounts are not refundable if you pre-pay them and the person does not end up going to that school or needing the medical care.

  5. If you make gifts to count against the current lifetime cap of $11.4 million and the law changes back to only $5 million, gifts made before the cap drops back are “grandfathered” in and protected.

  6. Gifts to charities do not count against the $11.4 million lifetime cap and not only reduce estate tax exposure but can reduce income tax exposure for the year(s) the gift(s) is(are) made.

  7. Gifting of property which has appreciated in value---such as stocks or real estate---saves the donor the capital gains taxes which would be incurred if the asset was sold and that cash donated to the charity. The charity, however, can sell the asset tax free. This is perhaps the most underused planning tool.

  8. Life insurance proceeds are not subject to estate taxes if the beneficiary is not your estate. The amounts spent to purchase insurance, however, are subject to the $15,000 annual exclusion and amounts spent on top of that for any beneficiary count against the $11.4 million lifetime cap. This might be the second most underused planning tool.

  9. If an estate tax return is filed for the business owner (or spouse) who dies, then any amounts not used of each person’s $11.4 million lifetime cap can then be transferred to the surviving spouse. This is a very good reason to file an estate tax return even if no money is owed for estate taxes.

  10. A corporation (or other entity) can make gifts in addition to those made by any person. However, such gifts will not be a deduction to the entity and is likely a constructive dividend to the owner(s) triggering income tax issues and counting towards the lifetime cap. But as a matter of formality, gifts can be made as long as the shareholders agree.


If your business is your largest asset---as it almost always is for any business owner---how assets get valued becomes a very important issue. Most good buy-sell agreements force business owners to perform an annual valuation in the event that someone needs to be bought out in the following year. The annual valuation is not just a good idea because it complies with the buy-sell agreement but also because it can give you ammunition in dealing with the IRS after you die and the value of your interest in the business needs to be listed in probate and other tax forms. The company which does an annual valuation and uses a recognized valuation method---especially if done by a third party such as an outside CPA firm---will likely find the valuation usable by their owner’s estates and take one possible fight with the IRS off the table.


Most people do not give serious thought to gifting programs when they are starting a business because a startup business usually does not have a lot of extra cash to give away directly to persons or groups (or indirectly through payments made to its owners), but the chance to accomplish some significant gifting exists which can ultimately yield huge tax savings.


For example, let’s assume a corporation with 10,000 shares started in 1990 now has a value of $25 million. More than likely, the value increased a bit each year to where it is now. An owner who owns the majority interest in the company---if not all 10,000 shares as is common---could have been gifting shares in the company all along the way when each share would have been far less than it is today. While today’s per share value might be $2500, there would have been times when it might have been given away only worth maybe $200 a share or $400. In any event, it was quietly likely a lot less than the current $2500. The owner could have given away a lot of stock under the annual exclusion—even when it was only $10,000 a person going back to 1981---when the value was $300 a share and not $2500. Starting a gifting program when your business is young allows for a removal of potentially large amounts of assets from your estate and could save your estate that 40% minimum estate tax if you are fortunate enough to have an estate over the $11.4 million lifetime cap. The owner certainly needs to be mindful that keeping a majority interest is important but many solid planning opportunities get lost in the early years when it would have cost virtually nothing to engage in solid planning.


The gifts that can be made by the business owner can come directly from the corporation itself or from its owners (who have presumably received the funds from the corporation and are taxed upon those receipts). There is no doubt that charitable gifts can be made by the corporation. The issue of a corporation gifting amounts to the owner’s children, grandchildren, or others can be a dicey one. One way around this is to set up a trust where the owner’s children, grandchildren, or others are the beneficiaries and the owner gifts the stock into the trust. The trustee then votes the shares and can sell the shares to provide cash to the beneficiaries. While the trust may have to pay capital gains taxes, that cost will certainly be much less in percentage terms than if the stock is held by the owner at death and the estate is over the $11.4 million lifetime cap thus triggering a 40% minimum tax.


Life insurance can be one of the best ways to transfer large amounts of money with minimal to non-existent tax implications. For example, if a company purchases a life insurance policy worth $10 million on its owner, pays premiums of $15,000 a year, and neither he/she or his estate are the beneficiary then the premiums paid count towards $15,000 annual exclusion but on death you will have paid a huge benefit to those beneficiaries; which could be used to pay estate taxes if the estate is that large or simply go into the beneficiaries’ pockets otherwise.


Many business owners wish to fund their children’s’ or grandchildren’s’ educations by donations to a qualified 529 program. The first $15,000 per child is tax free because of the annual exclusion and anything paid above that counts towards the $11.4 million lifetime cap. A lot of educational expenses can get paid along the way using this vehicle; though the better planning option can be to make direct payments as the costs are incurred by the student through you loose the ability to make these $15,000 a year gifts while the children or grandchildren are young if they do not ultimately attend where you make the payments to.


Charities are even more favored because the amounts to charities are not subject to the $15,000 annual exclusion but can do much to reduce the estate to keep it below the $11.4 million lifetime cap. The giving of appreciated property, likes stocks and real estate, can be one of the best planning tools of all.


Ultimately, gifting needs to serve not only a financial goal such as lowering taxes but also a human goal which is important to the business owner such as paying for their heirs’ educations, medical expenses, or donating to favored charities.


As a business owner you would want to take the additional step if you are married to shift assets to a spouse to try and keep the value of your estate under that $11.4 million number (after deducting the gifts above the annual exclusion). Gifts between spouses for any reason do not count towards the $11.4 million number so the goal is to not exceed that $11.4 million number for either spouse, or if not possible, to make sure that both spouses have that $11.4 million in assets to minimize the estate taxes. If the first spouse dies and only uses $5.4 million of the lifetime cap, then the surviving spouse can attach the unused $6 million and effectively end up with a cap of $11.4 million if an estate tax return is filed. Such a return should be filed even if no tax is due.


Good coordination at least annually between business owners, their attorneys, and their accountants is the best way to make sure that all of these Top 10 rules are not only complied with but also maximized so as to minimize the estate taxes which might otherwise be due.


You have lots of ways you want to spend your money. Plan ahead and your money can end up more where you want it to go and not to the IRS.

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