Turning a $14,000 Tax-Free Gift Into a $1,500,000 Gift

A headline sounding more like the used car salesman’s pitch we’ve all been cautious about. However, this is no joke or trick. By becoming informed and knowing current tax laws, you could be saving you and your heirs millions of dollars upon your and your spouse’s death by strategically planning your estate and taking advantage of the many tools available. There are many opportunities the tax law provides that the affluent community neglects to take advantage of, gifting being one of the most important.



2017 Gift Exemptions

Annual Gift Exclusion Per Individual:                                                                                                        $14,000.00

Lifetime Gift Exclusion Per Individual:                                                                                                      $5.49 Million

Lifetime Gift Exclusion Per Married Couple:                                                                                          $10.98 Million


One of the most important and strategic ways to gift is to use your gift exclusions to fund life insurance. To start, current tax laws allow individuals to gift up to $14,000 per year per person, and $5.49 million over one’s lifetime. Advisors and accountants urge those that are financially able to gift to do so, and the reasoning is clear. By gifting this money out of your estate, you are protecting your assets from federal estate taxes, gift taxes, and transfer taxes. Essentially, what you don’t give away using your gifting limit (while you’re alive and well) will become automatically devalued by as much as 50% upon your death if you fail to plan properly. There are many ways to gift, but here is one strategy that is the most beneficial way to gift to your heirs tax-free.

The answer is to set up an Irrevocable Life Insurance Trust (ILIT). The way this works is simple. Instead of gifting to an heir directly, place the proceeds into an ILIT, which will then purchase a life insurance policy on you and/or your spouse’s lives. Keep in mind that the policy is now out of your estate, and the beneficiaries are not subject to the estate taxes that would have been owed upon death. In turn, your heirs will receive multiples of what they would have received otherwise upon your passing from the death benefit of your life insurance policy. This could result in your potential $14,000 annual gift becoming worth as much as $1.5 million tax-free as a death benefit from your policy. On the other hand, if you and your spouse have the financial capability to both gift $14,000 annually and using the combined $28,000 to produce up to $3 million tax-free to your heirs. That is over a 100x increase over the annual $28,000 gift in any given year!

Very simply, this gift will inflate the proceeds upon death exponentially, as the death benefit would be larger than a simple gift. Since the trust owns the life insurance policy, there will be no income or estate taxes due to your heirs as the funds are outside of the estate. The benefit could be substantially greater depending on your age and health at the time the life insurance policy is purchased.

As you can see, strategically planning your retirement isn’t all that daunting, and can be done correctly with the right team of professionals. Please contact us for a complimentary consultation for further information, and if you think this strategy could benefit you.

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