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The easiest way to reduce your estate tax is by taking full advantage of your Annual Gift Tax Exclusion.  Under current law, you can give away up to $13,000 per year to as many people as you want.  If you are married, you and your spouse can give a combined $26,000 a year to your children, grandchildren, and anyone else you choose. The $13,000 is adjusted annually for inflation, and rounded to the lowest $1,000. Taxpayers can transfer substantial amounts free of gift tax through the proper use of this exclusion.

If annual gifts exceed $13,000 to any one donee, the first $13,000 is covered by the exclusion and the excess is taxable. Such excess may not result in a gift tax liability if a person has an unused Gift Tax Unified Credit (discussed below). The concept of annual exclusion gifts is generally not pertinent to gifts between spouses since these gifts are usually gift-tax free under a separate set of rules relating to the marital deduction.

A gift by someone who is married can be treated as split between the husband and wife, even if the cash or gift property is actually provided by only one of them. It is called “Gift-Splitting”.  This is useful where a large portion, or all, of the assets are owned by one spouse. It is especially useful where the donee is a child from a prior marriage. It allows a married donor whose spouse consents to gift-splitting to give up to $26,000 a year to each donee.