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There are many different facets to consider when you are engaged in your estate planning efforts. Transferring assets is not always as simple as an exercise in pie slicing. You should carefully consider the impact that a direct inheritance can have on each of your loved ones. If you act in a discerning manner, you can provide for each person that you love in the optimal fashion. With this in mind, we will look at the value of special needs trusts in this paper.

MEDICAID COVERAGE

You have probably heard of the Medicaid program. This is a health insurance

“You might think that you can give gifts without being taxed for your generosity. After all, if you give someone a cash gift, you are giving a portion of what is left after you paid taxes

on your income.”

WHAT ARE THE INDIANAPOLIS GIFT

TAX EXCLUSIONS?

PAUL A. KRAFT Indiana Estate Planning Attorney

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Unfortunately, this logic falls on deaf ears when it comes to the tax man. There is a federal gift tax in place, and it has been around continuously since 1932. To provide some historical background information, the estate tax was enacted in 1916. During the first few years, people who were exposed to the estate tax gave gifts to their family members to avoid the tax. The gift tax was enacted in 1924 to close this window of opportunity. Some people were not happy with this arrangement, so pressure was applied, and the gift tax was repealed in 1926. In 1932, the gift tax was reenacted, and it is been around ever since then. During the 1970s, it was unified with the estate tax. Everyone does not pay the estate tax or the gift tax, because there is a relatively large unified credit or exclusion that allows you to transfer a certain amount tax-

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free. This unified exclusion stands at $5.43 million in 2015.

MARITAL DEDUCTION AND PORTABILITY

These transfer taxes only come into play when you transfer assets to someone other than your spouse. If you are married, and your spouse is an American citizen, you can transfer unlimited assets to your spouse free of taxation. Plus, the estate tax is portable between spouses. After you pass away, your surviving spouse could use your exclusion, and his or her own exclusion. However, Internal Revenue Service Form 706 must be filed to opt for portability.

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TAX-FREE GIVING

In addition to the unified lifetime gift and estate tax exclusion, there are three other gift tax exclusions that we would like to touch upon here. The most significant one is the $14,000 per person, per year, gift tax exclusion. Each individual taxpayer can give up to $14,000 to any number of gift recipients within a calendar year tax-free. To be clear, this exclusion sits apart from the unified lifetime exclusion. You could give $14,000 during this calendar year to 100 different people, and you would not be using any of your unified lifetime exclusion. The utilization of this exclusion can be part of an estate tax efficiency strategy. To provide an example, if you are married, you and your spouse can combine your respective annual exclusions. This would allow you to transfer $28,000 tax-

free to multiple family members. Let's say that you have three married children. You and your spouse could give $28,000 to each husband and wife every year without incurring any transfer tax liability. This can add up over a number of years. Direct gift giving is a possibility, but you could also use this exclusion to fund certain types of trusts,

and it can be used to distribute shares in family limited partnerships. In addition to the $14,000 per year, per person exclusion, there is also a medical exclusion. If you want to pay medical bills for others, you can do this without incurring any gift tax exposure. This exclusion also allows you to purchase health insurance for the benefit of others.

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The last exclusion that we will look at is the educational exclusion. You are allowed to pay school tuition for students free of the gift tax, as long as you pay the institution directly. This educational exclusion does not extend to books, fees, and living expenses. However, you could use your $14,000 per year exclusion to provide additional tax-free support to students.

SUMMARY

There is a gift tax in the United States, and it is unified with the estate tax. However, there are exclusions that can be used to give gifts in a tax-free manner. You can give up to $14,000 each year to any number of gift recipients tax-free. It is also possible to pay medical bills and school tuition for students without incurring any tax liability. If you want to give more than $14,000 to others within a calendar year tax-free, you could use a portion of your $5.43 million unified lifetime gift and estate tax exclusion. People who are exposed to the estate tax can take steps to ease the burden. Tax-free giving can be part of the plan. To learn more, schedule a consultation with a licensed estate planning attorney.

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REFERENCES

Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-Gift-Taxes Forbes http://www.forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/

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About the Author

Paul A. Kraft

Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the

added perspective of an accounting background to his work. In addition to his practice, Mr. Kraft has lectured extensively in the areas of living trust planning, Medicaid planning, and

presenting public and private seminars on the importance of proper estate planning. He has also authored various articles on estate planning and is a contributing author of LEGACY:

Plan, Protect, and Preserve Your Estate–Practical Answers from America’s Foremost Estate Planning Attorneys.

Mr. Kraft is a co-founder of the Indiana Network of Estate

Planning Professionals, a charter member of the AmericanAcademy of Estate Planning

Attorneys and a founding member of the National Network of Estate Planning Attorneys. He is also a member of the Indianapolis Bar Association, including the Taxation, Business Law and Estate Planning sections; the Indiana State Bar Association, including the section on Taxation

Law; the Indiana CPA Society; and the Estate Planning Council of Indianapolis. Mr. Kraft is admitted to practice law before the Supreme Court of Indiana, U.S. District Courts, and U.S. Tax Court.

Frank & Kraft A Professional Corporation Attorneys at Law www.FrankKraft.com 135 N. Pennsylvania Street Suite 1100 Indianapolis, IN46204-2485 Phone: (317) 684-1100 Fax: (317) 684-6111