Cap City Law - Attorneys for the Business of Life

Attorneys for the Business of Life

Estate Planning Gift Strategies

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Written by Susan Pai, Senior Associate Attorney, Cap City Law, PS

Gifting to individuals can be a powerful tool in estate planning, allowing you to reduce your taxable estate while providing financial support to loved ones. According to estate planning experts, strategic gifting can offer tax benefits and help transfer wealth to future generations, but it’s important to understand the rules and considerations involved.

Annual Exclusion Gifts

Annual exclusion gifts allow individuals to transfer assets tax-free up to a certain amount per recipient each year. In 2024, the annual gift tax exclusion is $18,000 per person. This means an individual can give up to $18,000 to as many people as they wish without incurring gift tax or reducing their lifetime gift tax exemption. Married couples can combine their exclusions to give up to $36,000 per recipient annually. These tax-free gifts can be an effective way to gradually reduce the size of one’s taxable estate over time while providing financial support to family members. However, it’s important to note that not all gifts qualify for the annual exclusion – they must be of “present interest,” meaning the recipient can access and use the gift immediately.

Lifetime Gift and Estate Tax Exemption

The lifetime gift and estate tax exemption allows individuals to transfer a substantial amount of wealth during their lifetime or at death without incurring federal gift or estate taxes. For 2024, the exemption amount is $13.61 million per individual. This unified credit applies to both lifetime gifts and estate transfers combined, meaning any portion used for gifting reduces the amount available for estate tax purposes. Married couples can effectively double this exemption to $27.22 million through gift-splitting and portability provisions. It’s important to note that this high exemption amount is temporary and scheduled to decrease significantly after 2025 unless Congress takes action, potentially reverting to around $6-7 million (adjusted for inflation). Given this uncertainty, some financial advisors recommend considering larger lifetime gifts now to lock in the current high exemption amount.

 

 

Gift Tax Exemption Sunset

The federal gift tax exemption is set to undergo significant changes at the end of 2025. Currently, the exemption stands at $13.61 million per individual for 2024, but it is scheduled to sunset on December 31, 2025, unless Congress takes action. Without intervention, the exemption will revert to $5 million (adjusted for inflation) in 2026, effectively reducing it by approximately half. Estimates suggest the post-sunset exemption could be around $6.8 to $7 million per person. This impending change creates a “use it or lose it” scenario for high-net-worth individuals, as any unused portion of the current higher exemption will be lost after the sunset. Estate planning experts advise those with substantial assets to consider making large lifetime gifts before the end of 2025 to take advantage of the current elevated exemption levels and potentially reduce future estate tax liabilities.

Spousal Gift Splitting Strategy

Spousal gift splitting is a valuable estate planning strategy that allows married couples to maximize their tax-free gifting potential. Under this approach, spouses can combine their individual annual gift tax exclusions, effectively doubling the amount they can give to each recipient without incurring gift tax. For 2024, this means a married couple can jointly gift up to $36,000 per recipient annually without triggering gift tax or using their lifetime exemption. To utilize gift splitting, both spouses must be U.S. citizens or residents and consent to the arrangement on a gift tax return. This strategy can be particularly useful for transferring wealth to children or other beneficiaries, such as funding college savings accounts or providing down payments for homes. However, it’s important to consider potential drawbacks, such as the impact on each spouse’s lifetime exemption in case of divorce or changes in tax laws.

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