This Christmas, you might want to financially bless your family. Have you heard the song, “If I Had A Million Dollars”? It’s about all the things we’d buy for those we love, just to love them. The desire to give gifts, and especially financial gifts, is one that many of us share.
You may have toiled tirelessly to provide a better future for your family, only to be saddened by the financial burden imposed by the IRS when it comes to transferring that wealth. Understanding the implications of estate and gift taxes becomes essential to navigating this financial landscape.
Estate and gift taxes are intertwined in the U.S. tax credit system, offering individuals a lifetime gift and estate tax exemption of $12.92 million per person in 2023, which doubles for married couples to $25.84 million. Each taxable gift made during one's lifetime chips away at this exemption, highlighting the importance of strategic financial planning.
The estate tax rates in the United States currently range from 18% to a staggering 40%. And the presence of estate taxes in twelve states plus Washington D.C., coupled with six states enforcing an inheritance tax, can significantly diminish the intended wealth transfer to your loved ones. A few states have an inheritance tax, which is different from an estate tax. Inheritance taxes are paid by heirs or inheritors upon receiving the inherited assets. An estate tax, on the other hand, is a tax levied on the entire taxable estate itself.1 Thus, it becomes essential to explore effective strategies to help protect your assets from this substantial financial drain.
The annual exclusion provides a valuable tool for helping to mitigate taxes, allowing a $17,000 per donor, per beneficiary gift without tax implications. Married couples can collectively bestow $34,000 in 2023 without filing a gift tax return. This exclusion becomes particularly advantageous for those with sizable estates, enabling significant reductions year after year.
For those with a focus on education, the "super-funding" option for a 529 plan emerges as a strategic move. This allows a one-time contribution of up to five times the annual exclusion amount, potentially enabling a couple with numerous grandchildren to give away a substantial sum, mitigating gift tax implications. Additionally, direct payment of tuition to educational institutions on behalf of beneficiaries, irrespective of their educational level, provides another avenue to support loved ones while mitigating tax implications. In some states, you can even direct a portion of state tax credits toward private school tuition, up to a certain amount.2
Medical expenses present a similar opportunity for tax-efficient giving. Payments made directly to medical providers for someone else's medical bills do not count towards the annual exclusion or the lifetime unified credit, allowing for strategic financial support in times of need.
When contemplating asset transfer, it is generally more advantageous to gift money rather than assets (like real estate and stocks) during one's lifetime. This is especially true for appreciated assets, as gifting them while alive may carry the original cost basis, potentially resulting in significant tax liabilities for the recipient upon sale. The step-up in basis that occurs with inherited assets at the time of death can mitigate these tax implications.
While minimizing future tax bills is a primary motivation for adopting these strategies, there are additional benefits. Efficient financial planning can help bypass probate, expediting the transfer of gifted assets to heirs.3 Witnessing loved ones enjoy the fruits of your hard work becomes a tangible and rewarding outcome of these strategic financial moves.
Maximizing tax-efficient giving not only aids in mitigating future tax bills but also facilitates the bypassing of probate, ensuring a smoother transfer of assets. By leveraging tools such as tax credits, annual exclusion, and strategic giving for education and medical expenses, you can navigate the complex financial landscape, ensuring a more seamless transfer of wealth to future generations.
Witnessing loved ones enjoy the blessings of accumulated assets is one part of our personal approach to strategic financial planning. We’re here to help you make the most of your financial gift giving this Christmas season and beyond!
1. https://www.nerdwallet.com/article/taxes/estate-tax - 11/30/2023
2. https://acsto.org/donors/what-is-a-tax-credit - 11/30/2023
3. https://trustandwill.com/learn/what-is-probate - 11/30/2023