This is a follow-up entry to the entry titled “A Primer on Gift and Estate Tax in Oregon.” Even though the gift tax rate and estate tax rate are the same and have the same exemption amounts, money can be saved by gifting instead of letting the assets pass testamentary. Let me demonstrate:
Assume the existence of a tax rate of 40% (for gift and estate tax) and a $5,000,000 exemption (for easy math), and a person with a net worth of $10,000,000.
Estate Tax
If the person dies with a net worth of $10,000,000, 40% of 5,000,000 is taxed (the excess of the $5,000,000 exemption), totaling 2,000,000 paid in estate tax, which leaves 8,000,000 to his heirs.
Gift Tax
If the same person gives away $3,571,429 before he dies, he is subject to $1,428,571 in gift tax, which leaves him with $5,000,000 to pass to his heirs at death, but plus the $3,571,429 he gifted them already, the heirs received $8,571,429. In other words, gifting saved this guy $571,429 in taxes.
Planning for a taxable estate is complex, and there are many factors to consider. However, this gifting strategy is one tool at the disposal of a qualified estate planning attorney.
