Resources/Planning Best Practices

October 28, 2023

Gifts That Keep Giving: Lifetime Annual Gifting & Lifetime Estate Exclusion Limits

Justin Hearty

It’s time to think about your heirs. If you don’t want Uncle Sam to be number one on that list, it’s time to get a plan in place!

Estate planning is an important aspect of securing your family’s financial future and ensuring that your assets are distributed according to your wishes. Two key components of estate planning are the federal lifetime estate exemption and yearly gifting limits. While these figures may change over time, it’s important to stay informed. As they say, failing to plan is planning to fail!

Federal Lifetime Estate Exemption

The federal lifetime estate exemption is one element of estate planning. It refers to the total value of assets you can leave to your heirs without incurring federal estate taxes. This exemption amount is subject to change, so it’s essential to stay updated on the current limit.

One of the primary objectives of estate planning is to maximize the use of this exemption to protect your wealth for future generations. By structuring your estate in a tax-efficient manner, you can minimize the impact of estate taxes and preserve more of your assets for your loved ones.

In 2023, the current Federal Lifetime Estate Exemption stands at $12.92 million for individuals and $25.84 million for married couples. It’s worth noting that these figures might see adjustments for inflation in 2024 and 2025, emphasizing the importance of staying vigilant as the limits evolve.

*Important Note:In the realm of taxation, it’s essential to recognize the temporary nature of these thresholds. The Tax Cuts and Jobs Act, initiated in 2017, is set to conclude its effects after 2025. Consequently, the lifetime exemption might revert to its pre-2017 status of $5 million, adjusted for inflation, commencing in 2026. During this timeframe, numerous developments may transpire, underscoring the significance of readiness, regardless of the eventual outcome.

Yearly Gifting Limits

In addition to the lifetime estate exemption, there are yearly gifting limits to consider. These limits dictate the maximum amount you can gift to an individual each year without incurring gift taxes. Similar to the lifetime estate exemption, these figures can change, so it’s important to be aware of the current limits.

Yearly gifting can be a powerful estate planning tool, allowing you to gradually transfer assets to your heirs during your lifetime. By staying within the yearly gifting limits, you can reduce the size of your taxable estate and potentially lower the overall tax burden on your estate.

It’s important to note that there may be specific rules and regulations governing the types of gifts that qualify under these limits. For instance, gifts for educational or medical expenses may not count towards the yearly gifting limits.

In 2023, the annual gift tax exclusion is set at $17,000 per recipient. If you are married, you and your spouse can each give $17,000 to the same person, for a total of $34,000. The IRS adjusts these amounts for inflation each year. If you gift more than the above amounts to one person, you will have to report it to the IRS on Form 709.

Taxable vs Non-Taxable Gifts

Beyond the specifics of annual and lifetime gift tax exclusions, you may wonder when a gift needs to be reported for tax purposes. Typically, if you exceed the yearly limit, you can expect to pay gift tax on the following:

Direct gifts

These occur when you directly transfer cash, a vehicle, or other forms of property to another individual.

Indirect gift

This happens when you make a gift on behalf of someone else.

Complete gifts

A complete gift is one where you relinquish all rights to a property after transferring it to someone else.

Incomplete gifts

In contrast, an incomplete gift is when you retain some level of control over the gift even after transferring it to another person.

Reversionary interest

This type of gift involves transferring property to someone else for a limited time.

Net gifts

In this scenario, the recipient, not the donor, is responsible for paying the gift tax when it comes time to file.

Examples

Taxable gifts:

Cash
Securities like stocks and bonds
Real estate and vehicles
Art

Non-taxable gifts:

Gifts to a spouse
Qualified transfers, such as direct payments to a qualified educational institution or medical provider (e.g., paying for a grandchild’s college tuition)
Support payments, which may not be taxed when fulfilling legal obligations for children or dependents (e.g., child support)
Divorce settlement payments, particularly alimony, if the agreement meets specific criteria
Donations to political organizations, as they are considered advocating for public service and are not taxable
Business transfers, as the IRS considers most to be another form of compensation for work

*Important Note In the case of gifts between spouses, there is generally no gift tax liability for transfers between U.S. citizen spouses. However, if one spouse is not a U.S. citizen, there may be limitations on tax-exempt transfers.

Why Estate Planning Matters

Estate planning is not just for the wealthy. This process is for anyone who wishes to protect their assets and ensure a smooth transition of wealth to their heirs. Proper estate planning can help you:

Minimize estate taxes
Avoid probate
Provide for your family’s financial well-being
Specify your healthcare and financial decisions in case of incapacity

Conclusion

While the specifics of the federal lifetime estate exemption and yearly gifting limits may vary, the principles of estate planning remain constant. To effectively manage your estate, you should stay informed about current regulations and consult with a financial advisor or estate planning professional. They can help you create a tailored plan that aligns with your financial goals and ensures your legacy endures.

Always remember that estate planning is a dynamic process, and what works today may need adjustments in the future. Stay engaged with your financial and legal advisors to adapt your plan as circumstances change!

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

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