Minimize Taxes With Estate Planning and Gifting
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Key Points
■ In 2023, taxpayers can gift $17,000 per individual annually tax-free.
■ No gift tax return filing is required for the annual gifting allowance.
■ No gift tax has to be paid until your lifetime total taxable gifts exceed the applicable exemption amount.
■ Gifts to a spouse are generally not taxable.
A thorough estate plan that incorporates gifting may help ensure your wealth is distributed according to your preferences while also assisting you in managing your estate's tax liability. The regulations governing estate tax and gifts are complex, and this guide touches on a few topics to consider. Consult your financial advisor, investment specialist, tax advisor, or attorney for help creating an estate plan that meets your circumstances.
Reduce Estate Taxes by Giving Annually
Individuals can leave their heirs up to $12.92 million without incurring federal estate tax obligations under existing tax rules in 2023. A taxable estate worth more than $12.92 million may be liable to estate tax at graded rates of up to 40%. Gifting not only allows you to share your money with your loved ones during your lifetime, but it also lowers the value of your estate, potentially lowering any estate tax your estate may have to pay after your death.
In 2023, taxpayers can present a maximum of $17,000 per recipient to as many people as they want without incurring gift tax consequences. Married couples can give each other $34,000. Hence, if you have four children and three grandkids, you may contribute $17,000 each for $119,000 in 2023, or you and your spouse can donate $238,000. This yearly gift tax exclusion amount is subject to change each calendar year. Nonetheless, you may give presents to as many people as you choose in any given year, up to the annual exclusion amount, without incurring a gift tax penalty.
Know your lifetime total taxable gift limit.
Every property transferred during your lifetime is subject to gift taxes. Each person gets a lifetime gift tax exemption of $12.92 million in 2023. Gifts within the yearly exclusion are free from gift tax in the year they are made and excluded from the lifetime total of gifts given. Donations over the annual exclusion limit are taxable and must be reported to the IRS on a gift tax form. These sums are also deducted from the lifetime exemption. Nonetheless, you will be subject to gift tax once your lifetime gifting total exceeds the $12.92 million maximum (or the applicable limit in effect at the time). Furthermore, gifts to your spouse or charity are often not taxed.
College gifting options
To save for your children's or grandchildren's future college expenditures, consider utilizing your yearly gift tax exclusion to establish a 529 college/education savings plan. You can also use a 529 plan's unique accelerated five-year gifting capability to make a combined gift to each beneficiary of up to $85,000 ($170,000 per married couple). This falls under the $17,000 tax-free limit each year as long as no other donations are made to that recipient for four years after the year the one-time gift is made. If you die before the conclusion of the five-year term, however, a pro-rata amount of the facility will be added to your estate for estate tax purposes.
Payments made directly to a qualifying school for tuition or to a health care provider for medical costs on behalf of another person are not subject to gift taxes. The education and medical expenditure deduction is in addition to the yearly exclusion per beneficiary.
Using the Unlimited Marital Deduction
The IRS gives spouses specific tax considerations. The unlimited marital deduction allows you to transfer any sum to your spouse during your lifetime or death without paying federal gift or estate tax, as long as both parties are US citizens. (If not, further rules apply.) As a result, any inheritance taxes owed following the first spouse's death can be avoided by leaving the real estate to the surviving spouse.
Tax Advantages of Charitable Gifts
Contributions to charity are generally exempt from gift taxes. Lifelong charitable contributions offer two additional benefits: they qualify for income tax deductions and can lower the amount of the donor's inheritance.
Charitable bequests made after death, either through a will or a carefully established trust, may also result in estate tax savings. Assume Joe and Sheila Smith have $12.92 million in separate property ownership. They have no children and want to leave as much money to their chosen organizations as possible. Joe may leave all his possessions to these organizations when he dies; no federal estate tax would be owed. Sheila may continue to sustain herself with her assets and then donate the remaining to charity, avoiding estate taxes once more. Joe may leave everything to Sheila and avoid inheritance taxes thanks to the marital deduction. Sheila would donate her remaining property to charity when she died, and her estate would receive the full deduction.
The Value of Trusts in Estate Planning
Irrevocable trusts can be helpful with estate planning strategies and can result in significant estate tax savings. Trusts that handle life insurance policies can assist in keeping policy money out of your estate. Different forms of trusts can achieve other goals, such as aiding charitable giving or efficiently combining the inheritance tax exemption with the unlimited marital deduction.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
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