Estate planning is a pivotal aspect of financial management. By understanding the gift and estate tax exclusion, you can effectively transfer wealth to your loved ones and potentially reduce your tax burden. Let’s dive into the nuances of gifting and its tax implications.
Why Gifting Now Makes Sense
Gifting assets while you are alive allows your loved ones to benefit immediately. Not only do you get the joy of witnessing the positive impact of your gift, but these assets will also grow outside of your estate, and that will provide an added layer of tax efficiency.
Breaking Down the Gift Tax Exclusion
Every year, you can gift up to $17,000 to as many individuals as you wish without triggering any gift tax. For couples, this amount doubles to $34,000 when “splitting” gifts. If your generosity exceeds this amount for a particular person within a year, you’ll need to report it using IRS Form 709.
It’s essential to know that these annual exclusions are separate from your lifetime gift and estate tax exemption. Gifts beyond the annual exclusion will start to consume your lifetime exemption.
The Evolving Gift and Estate Tax Exemption
Recent changes, particularly the Tax Cuts and Jobs Act (TCJA), have significantly influenced the gift and estate tax landscape. Here’s a snapshot:
- Highest tax rate: 40%
- Gift and estate tax exemption in 2017: $5.49 million
- Gift and estate tax exemption in 2023: $12.92 million
This hefty $12.92 million exemption is a combined value for both gifts and estate taxes. Referred to as a “unified credit” by the IRS, using this exemption for gifting will reduce its available amount for estate taxes. If you’re part of a couple, your combined exemption skyrockets to $25.84 million.
However, this increase is temporary. Post-2025, unless renewed by Congress, the exemption will drop back to $5.49 million, adjusted for inflation. The pressing question is, how can one maximize the benefits of this exemption before it decreases?
Strategies to Lock in the Exemption
The clock is ticking, but there are still strategies to harness the $12.92 million exemption. One straightforward method is gifting assets now. Imagine gifting the entire $12.92 million today, and with a hypothetical growth rate of 5% annually, its value could exceed $21.04 million in a decade – all without gift or estate taxes.
Contrarily, holding onto the assets could see them subjected to a 40% tax rate if passed on after a decade, especially with the anticipated reduced exemption post-2025. This difference can result in millions more for your beneficiaries.
Safeguarding Your Gifts
You might be concerned about gifting substantial amounts, especially to those unprepared for the financial responsibility. An effective solution is to transfer assets to an irrevocable trust with specific stipulations. This method ensures the assets’ protection and provides a structured means for beneficiaries to access them.
Additional Tax-Free Gifting Avenues
Beyond the annual exclusion, direct payments to medical or educational providers for someone’s benefit can be made without incurring taxes. For instance, directly covering a family member’s medical bills or tuition fees offers another layer of tax-free generosity.
Choosing the Right Assets for Gifting
Remember, the cost basis of your assets will transfer to the recipient. Gifting assets that have significantly appreciated might lead to substantial taxable gains when sold. On the contrary, inherited assets often get a “step up” in basis, potentially nullifying taxable gains if sold shortly after receipt. Thus, choosing the right assets for gifting is crucial.
Gifting can be a potent estate planning tool. While the joy of giving and the immediate benefits to your loved ones are undeniable, understanding the tax implications ensures you maximize its potential.
We Are Here to Help!
Our firm can provide the assistance you need if you are ready to work with a Phoenix, AZ estate planning lawyer to put a plan in place. You can send us a message to set the wheels in motion, and we can be reached by phone at 888-222-1328.
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