Estate Planning Blog

How Much Money Can Be Gifted Tax-Free?

There are limits to the amount of assets a person can give to another person or entity without needing to pay a federal gift tax. Your generosity could come with a tax bill. However, there are ways to manage this. A recent article from Erie News Now, “What Is the Annual Exclusion for Gift Taxes?” digs into the details.

First, what is the gift tax? In formal terms, a gift is the transfer of property from one person to another when the donor receives nothing or less than full value in return. Disguising a sale as a gift gets into murky waters and is not recommended. In 2024, the annual exclusion for gift taxes is $18,000 per person, which means you can give $18,000 to as many people as you want without paying any gift taxes.

Gifting, when part of a well-thought-out estate plan, can effectively reduce tax liabilities by decreasing the estate’s value. However, it’s important to note that haphazard gifting can lead to unfavorable outcomes. This underscores the need for strategic planning and the guidance of an experienced estate planning attorney.

When you do need to pay a gift tax, it’s high—anywhere from 18% to 40%. It was designed to prevent people from using gifts to avoid estate taxes, which is why there is a lifetime gift limit.

The lifetime exemption is the total value you can give away during your lifetime before federal gift or estate taxes are required. In 2024, this limit is set at $13.61 million. Understanding this concept is key to managing your gifting strategy effectively.

Think of the gift and estate taxes as two parts of the same pie. The gift tax applies to gifts made while you are living, while the estate tax is when you have passed and is based on the total value of your estate.

Together, the lifetime and annual exclusions provide flexibility and opportunities for managing taxes in estate planning.

Consult with an estate planning attorney before making large gifts or a series of large gifts. Some tax pitfalls must be avoided, and penalties for gift tax missteps are costly.

Reference: Erie News Now (April 5, 2024) “What Is the Annual Exclusion for Gift Taxes?”

Prepare Now for Coming Changes to Estate Taxes

Anyone who wants to leave their estate to heirs needs to plan now so their wishes will be followed and, equally importantly, to minimize their estate’s tax liability. A recent article from The San Diego Union-Tribune asks, “Are you prepared for changes to estate tax laws? Here’s what you need to know.”

Because of the Tax Cuts and Job Acts of 2017, taxpayers who die in 2024 can pass up to $13.61 million federal tax-free to their heirs. In 2025, this amount will be adjusted for inflation. On January 1, 2026, the federal basic exclusion amount reverts to $5 million indexed for inflation. Many experts expect this to adjust to $6.5 to $7 million.

When calculating the total value of one’s estate, the IRS looks at all taxable gifts made while you are living, and all assets transferred upon your death. This includes the value of your home and its contents, retirement and investment accounts, life insurance not owned by an irrevocable trust, cash, annuities, boats, vehicles and bank accounts.

Estate planning must include tax planning. With the right planning, preserving the 2024 and 2025 higher exclusions may be possible through a lifetime gifting program. Let’s say the exclusion amount in 2026 is $7 million. You’d have to gift more than $7 million before January 1, 2026, to preserve the current exclusion amount.

Two years ago, in April 2022, the Treasury and IRS published Proposed Regulation Section 20.2010-1(c)(3) to limit certain types of gifts from qualifying for the current exclusion and restrict benefits of certain types of gifts if they were made within 18 months of the date of death. This regulation is still proposed and not final. However, you and your estate planning attorney must remember it during the estate planning process.

If making large, multi-million-dollar gifts is not possible without constraining the taxpayer’s lifestyle, there are other gifting strategies to use to take appreciating assets out of the estate over time. One way to do this is to make annual exclusion gifts every year. These are gifts that pass entirely tax-free. In 2024, a taxpayer could gift up to $18,000 per person to an unlimited number of people without paying any gift taxes.

Gifts to 501(c)(3) charities of any amount can be made tax-free with no gift or estate tax. This includes gifts made while you are living or after you have passed.

It is also permissible to pay an unlimited amount for tuition for an unlimited number of people, if the payment is made directly to the educational institution. These gifts may not include room, board, or fees. Similarly, one person can pay for another person’s medical expenses if the payment is made directly to the healthcare provider.

There are many ways to prepare for the coming changes to tax laws. What is right for one person may not be right for another, as everyone’s circumstances are unique. Discussing how to prepare for these changes with your estate planning attorney should take place soon, as it takes time to work out the details of a new estate plan and you can be sure estate planning attorneys will be very busy in 2025.

Reference: The San Diego Union-Tribune (April 30, 2024) “Are you prepared for changes to estate tax laws? Here’s what you need to know”

What Is IRS Rule 706 and Why Should Someone to File It?

IRS Form 706 Estate and Generation-Skipping Transfer Tax Return has become a hot-button issue in the estate planning and tax worlds. A recent article appearing in Forbes addressing this issue, “How To Avoid Faulty Advice On IRS Form 706 And The Portability Election,” makes it very clear this is one to get right from the start.

The IRS was so overwhelmed by the number of private letter ruling requests it issued a rule of its own to extend the ability to make the portability election to on or before the fifth anniversary of the decedent’s date of death.

What’s the issue? Portability allows a surviving spouse to claim their late spouse’s unused tax exclusion amount. It’s known as the Deceased Spouse Unused Exclusion Amount or DSUEA. The important thing to know is the DSUEA isn’t an automatic process. The spouse must complete Part 6 of IRS Form 706, and the portability election becomes effective as of the DOD of the deceased spouse.

This allows the surviving spouse to shelter more assets upon the other spouse’s death. It effectively locks in the deceased spouse’s exemption amount and gives the surviving spouse a greater chance of not needing to pay estate taxes upon the second spouse’s death.

This option will become even more critical in 2026 if the Tax Cuts and Jobs Act expires and the federal gift and estate tax exemption amounts will return to 2018 levels. With inflation, estate planning attorneys expect the revised exemption amount to be roughly $6 million.

Determining the form is unnecessary because the estate is not large enough to reach the exemption level, or it’s a waste of time to prepare the form, which could be an expensive mistake. The number of requests for private letter rulings clearly proves the value of ensuring this form is completed when administering an estate for a deceased spouse.

Speak with your estate planning attorney to learn if your estate will be impacted if the federal estate tax exemption returns to prior values. Planning ahead for the loss of a spouse and potential changes in estate tax liabilities will require time and resources to be well spent. The cost of a private letter ruling or paying federal estate taxes is far more costly.

Reference: Forbes (May 21, 2024) “How To Avoid Faulty Advice On IRS Form 706 And The Portability Election”

Avoiding Tax Issues When Gifting to Grandchildren

Gifting to grandchildren is a wonderful way to share your wealth with young loved ones. Getting some help at the right time can help ensure that they enjoy a bright future. However, taxes may drastically reduce the inheritance they receive. That’s why tax minimization strategies are vital for making the most of your legacy.

What are the Benefits of Gifting to Grandchildren?

Gifting to grandchildren can be transformative for them and their future. These gifts can make a difference, whether for education, starting a business, or simple financial stability. However, making the greatest difference will require a keen understanding of estate taxes.

Understanding Estate Taxes

Before a deceased person’s estate transfers to their inheritors, the government levies estate taxes. However, many ways exist to reduce or even avoid estate taxes altogether. Estate tax law is largely progressive and provides many allowances and deductions. In particular, accounts are available to fund your beneficiaries’ educations tax-free.

How Can 529 Accounts Help?

According to ElderLawAnswers, 529 accounts are ideal for helping your inheritors afford education. These special savings accounts are designed for college education expenses, K-12 tuition, apprenticeship programs and student loan repayments, and they offer significant tax advantages. The money you put into a 529 account grows tax-free, and withdrawals for qualified education expenses are also tax-free.

However, the disadvantage of a 529 account is that it only covers education-related expenses. General-purpose gifting has significant limits if you want to avoid a large tax burden.

What are the Limits on Gifting?

The IRS places annual limits on gifting to grandchildren, the annual gift tax exclusion. As of 2024, you can give up to $18,000 per year to each grandchild without incurring any gift taxes. If you stay within these limits, you won’t have to pay gift taxes or worry about reducing your lifetime gift and estate tax exemption.

Should You Consider a Trust?

Another strategy to reduce or avoid estate taxes is setting up a trust. You can structure trusts to manage your assets to meet specific goals. By implementing a trust, you can decide how and when your grandchildren receive their inheritance. This is particularly useful if they are young or not yet financially responsible.

What are the Types of Trusts?

There are various types of trusts to consider, such as:

• Revocable Trusts: These allow you to maintain control over the assets and make changes as needed.
• Irrevocable Trusts: These remove the assets from your estate, potentially reducing estate taxes. However, you cannot change the terms once it’s set up.
• Education Trusts: Specifically designed to fund education expenses, similar to 529 accounts but with more flexibility.

Do Right by Your Loved Ones

Gifting to your grandchildren is a loving and generous act. However, you should gift wisely to minimize your tax burden. Contact our law firm today to learn more about estate taxes and the best strategies for gifting to grandchildren.

Key Takeaways

• 529 Accounts: Fund a loved one’s education with tax-free growth.
• Annual Gift Tax Exclusion: Gift up to $18,000 per year to each grandchild without incurring gift taxes.
• Trusts: Consider different types of trusts to manage and distribute assets effectively.

Reference: ElderLawAnswers (Jul. 12, 2018) “Using 529 Plans for a Grandchild’s Higher Education”

Estate and Investment Planning Balances Short and Long-Term Goals & Building Wealth and Managing Taxes

Anyone with property, a car, a bank, or a retirement account has a certain amount of wealth they can build or preserve through a smart estate plan. In the next few years, individuals creating or updating an estate plan will benefit from a different approach to goals, assets and strategies. Economic concerns, changing tax rules and the looming extinction of social security, among other things, are changing future needs, investment timelines and where estate planning falls in our priorities.

Today’s estate planning shoulders an individual’s lofty goals for retirement, tax mitigation, advance care support and transferring the bulk of their wealth to heirs after death. A balanced portfolio includes aggressive investments and higher-return instruments to help meet longer-term goals, while safer investments, like bond funds or Roth IRAs, help meet short-term goals. We’ll discuss evolving goals in estate planning and different strategies to help meet your future needs, referencing Charles Schwab’s article, “2024 Planning and Wealth Management Outlook.”

Why Plan for Short and Long-Term Future Needs?

Whether retirement, senior care, or wealth preservation for heirs, strategic asset allocation and estate planning strategies hinge on carefully considering future financial needs. Today’s volatile markets spotlight financial questions of how much and when you’ll need to fund retirement to senior living and the time in between, while preserving wealth for beneficiaries.

Arriving at How Much Money You Need for Retirement – It’s Complicated

Retirement planning is a pivotal aspect of estate planning and wealth management, necessitating a personalized approach tailored to individual circumstances. Pinpointing the money that you’ll need in retirement is a tangled calculation. That magical number must account for taxes, lifestyle expenses and medical needs, depending on current or future health.

Financial advisors and estate planning attorneys help look beyond the less accurate benchmarks of the past and consider investments and strategies to maximize wealth building and minimize erosion.

Why Tax Planning in Estate Planning Is Second Nature

Taxes can erode wealth as you build it or decrease the wealth passed to your beneficiaries. Changing tax rules makes it harder to choose the right tax management strategy. Consider pairing a tax-advantaged traditional individual retirement account (IRA), Roth IRA, or qualified account, like a 401 (k), with taxable brokerage accounts and income-generating investments. A mix of estate assets can reduce or delay taxes and take some guesswork out of tax management.

Key Estate Planning and Investment Management Takeaways:

• Estate Planning: Today’s estate planning addresses retirement, tax mitigation, advance care support and transferring wealth to heirs after death.
• Multiple Timelines: A balanced portfolio meets shorter and longer goals.
• Managing Your Taxes: Using varied tax-management strategies can maximize wealth building and transfer.

Conclusion

Adopt a strategic outlook to align strategies for short-term volatility and meet long-term financial objectives. Pinpoint time horizons in your estate planning to personalize retirement needs and manage taxes. By working with our estate planning office, we can help you adopt a strategic approach that reaches beyond short-term uncertainties and embraces a holistic strategy.  Contact us today to discuss estate and wealth planning tailored to your unique needs.

Reference: Charles Schwab (Dec. 20, 2023) “2024 Planning and Wealth Management Outlook.”

Is Your Estate Plan Ready for Sunsetting Tax Cuts in 2026?

Many of these changes are set to expire at the end of 2025, meaning the time to prepare for their impact on estate plans is now, according to the article “These Tax Cuts are Sunsetting in 2026. Are your clients ready?” from Think Advisor.

The most visible change will be the lifetime estate and gift tax exemption changes. Before 2018, the exemption was $5 million per person and $10 million for a married couple. In 2023, those limits were $12.92 and $25.85 million, respectively. In 2024, those limits are $13.61 million for an individual and $27.22 million for a married couple.

The annual gift tax exclusion was also increased because of the TCJA. In 2023, it was $17,000; in 2024, it is $18,000. It’s not yet clear what it will be after 2025.

Unless something changes, on January 1, 2026, the estate tax exemption will revert back to $5 million; adjusted for inflation, it’s expected to be approximately $7 million per person.

There won’t be much of an impact for estates that won’t exceed the expected 2026 levels. However, the increases in farmland and home values may bring some unexpected increases to the size of many estates.

For those whose estates exceed the 2026 exemption levels, there are many options to reduce the size of the estate to minimize the impact of the lower exemption levels on their heirs in the future. An experienced estate planning attorney can make a strategic plan to address these changes.

One option is to spend down part of the estate, especially if you are older. Now would be the time to travel or make purchases you might have been putting off.

Making lifetime gifts is another way to reduce the size of your estate, while enjoying watching heirs enjoy their inheritance. Gifts could be to children, grandchildren, or others.

The same generosity could be focused on charity. If you’ve been meaning to make a gift at some point, this could be the year to make a legacy gift.

Another tactic: a Roth conversion. If your retirement accounts consist of IRAs, converting to a Roth can help with tax diversification. Money in a Roth is not subject to Required Minimum Distributions, which reduce taxes during retirement. Under the SECURE 2.0 Act, inherited Roth IRAs are tax-efficient for leaving an IRA to non-spousal beneficiaries.

The TCJA increased the standard deduction level, making it difficult for many taxpayers to itemize deductions. The higher standard deduction will revert back to roughly the pre-TCJA levels, which were $6,350 for single filers and $12,700 for those filing married and joint, both indexed for inflation.

Speak with your estate planning attorney to determine how the sunsetting of this law will impact your estate plan and choose your best options in the short and long term.

Reference: Think Advisor (Nov. 22, 2023) “These Tax Cuts are Sunsetting in 2026. Are your clients ready?”

Start Planning Now for Coming Changes in Estate Tax Exemption Levels

The historically high federal estate tax exemption will sunset on December 31, 2025. It may sound like there’s plenty of time to change your estate plan, but according to an article from Think Advisor, “Act Now to Avoid Estate Planning Logjam in 2025,” the time to start planning is now.

Your estate planning attorney will be in high demand over the next two years as more and more people realize their estate may be subject to the new lowered levels of the federal estate tax. Estate planning is a complex process; any strategy may take years to implement fully.

The 2017 Tax Cuts and Jobs Act delivered some of the most sweeping changes in federal tax law in nearly three decades. At the time, the exclusion amount for estate, gift and generation-skipping transfer tax purposes increased from $5 million to $10 million and was indexed for cost-of-life adjustments starting in 2010.

For anyone who dies in 2023, the exemption amount is nearly $13 million, or a combined exemption of a little less than $26 million for married couples.

The increase in the exclusion only applies to estates of decedents dying after December 31, 2017, before January 1, 2026, and to gifts made during that period. On January 1, 2026, the exemption returns to $5 million per person, indexed for cost of living.

You don’t have to die to take advantage of these generous exemptions.  However, you still need to enact some of the various strategies to move wealth out of your estate and be sure that such strategies are appropriately supported legally.

Start by realistically assessing your entire net worth, looking beyond your investment portfolio. Include the value of any assets included in your taxable estate. You’ll also need to know how much exemption remains if you’ve already engaged in some legacy planning.

Consider gifting assets to a qualified charity as one of the most effective ways to reduce the size of your estate.

If your focus is keeping wealth in the family, there are several strategies to pass wealth to the next generation while living and after you have died. Some are relatively straightforward, such as making annual gifts, while others are complex, including transferring assets to trusts or creating generation-skipping trusts.

Now is the time to meet with your estate planning attorney to determine which strategies could be used to reduce your taxable estate in light of the lowered exemptions.

Reference: Think Advisor (May 22, 2023) “Act Now to Avoid Estate Planning Logjam in 2025”