Personal Capital Tax Series – 3: Protecting Your Legacy

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Life is meaningful and complex – and so are the taxes associated with it. If you’re considering what you would like to leave your family or pursuing charitable giving, there are certain tax implications of both to consider.

The Estate Tax

Many taxpayers have some understanding, even if it’s vague, that there are estate and gift-tax exemptions within the IRS code. But did you know that you can use something called an “annual exclusion” that allows Americans to transfer billions in assets tax free each year?

Overall, you will trigger estate taxes only after you have accumulated assets worth more than $5.49 million, for 2017. (The total amount adjusts each year for inflation.) That figure is based on an individual’s assets, so married couples can protect nearly $11 million from estate taxes. There’s an estate tax marital deduction, which exempts (at least until your spouse dies) all your estate, no matter how large, from federal estate taxes if your estate passes directly to your spouse. Effectively, this means few people need to worry about federal estate taxes. Some states, however, have estate tax provisions that kick in much earlier, so it pays to know the specific state laws where you live. In addition, the new administration will likely be making changes to the estate tax, so you will want to consult a professional.

The Gift Tax

The gift tax differs from estate tax in that it applies to assets transferred during your lifetime. However, some taxpayers can take advantage of the annual exclusion associated with the gift tax.

If your assets do exceed the amount sheltered from federal estate taxes, using the annual exclusion may be one way to help reduce the overall value of your assets. This exclusion allows you to give $14,000 (currently) per year to any one person—and you can give this gift to as many people as you want, no matter their relationship to you. If you have three children (and they all have spouses) and eight grandchildren, for example, you could reduce your assets by $196,000 in just one year. And your spouse can also use the exclusion, so you could pass out as much as $392,000 in just one year to these family members. You can give friends money, too, if you are inclined.

Not only do these annual gifts reduce your overall assets, but they do not count against the lifetime gift-tax exclusion for your potential heirs. This is where estate taxes and gift taxes become intertwined, at least at the federal level. From a gift-tax perspective, each person is walking around with an approximate $5.5 million lifetime exclusion. That means you can conceivably give up to ~$5.5 million as a non-taxable gift. However, the $5.5 million cannot be exceeded without paying gift taxes.

For example, if you are single, and give your daughter $4.5 million during your lifetime (above the annual $14k/year exclusion), your lifetime exclusion will be reduced by $4.5M, to ~$1M.  Then at the time of your death, if your estate is worth more than that ~$1M, you will be subject to estate taxes. You could use the annual exclusion to tack on an additional $14,000 each year, which does not count against her lifetime exclusion. And you make that gift every year for as long as you like—none of those gifts would erode her lifetime exclusion amount.


There are many different types of trusts and each one is taxed differently, depending on its structure. From revocable/living trusts to irrevocable and testamentary trusts, trust taxation is highly personal to your own unique situation. Establishing a trust requires legal guidance, but you can start taking the right steps by scheduling time with a registered financial advisor.

While giving away wealth seems relatively simple on its surface, there are numerous nuances that can make things a bit tricky. To learn more, read our free “Personal Capital Tax Guide for Holistic Financial Planning.”

This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.

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Amin Dabit, CFP®

Amin Dabit, CFP®

Amin Dabit is the Director of Advisor Services with Personal Capital. Along with the EVP of Advisory, Amin helps lead Personal Capital’s financial planning experience and advice. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin works with the advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.

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