Understanding advanced estate planning strategies requires having a grasp of a few technical terms:

  • The annual exclusion is the amount you can gift to another individual (family or nonfamily member) in a single year without incurring gift tax implications. It is $14,000 in 2017.
  • The applicable exclusion amount is the value an estate must exceed before estate taxes become due. It is $5,490,000 in 2017.
  • The lifetime exclusion is the amount you can gift during your lifetime without incurring gift tax implications. It is $5,490,000 in 2017. The relationship between the annual exclusion and the lifetime exclusion is rather complex; when you make a gift to an individual that exceeds the annual exclusion, you reduce your lifetime exclusion. For example, a $20,000 gift to an individual in 2017 would decrease the donor’s lifetime exclusion by $6,000 ($20,000 – $14,000) to $5,484,000 ($5,490,000 – $6,000). This is significant because the amount remaining in the lifetime exclusion at the donor’s death is how much of his or her estate would be protected from estate taxes.
  • The unlimited marital deduction allows a married individual to transfer any amount of assets when he or she dies to the surviving spouse without incurring estate taxes.