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Gifting Strategies and Lifetime Gift Tax Exemption: Navigating Estate Planning

gifting strategies and lifetime gift tax exemption

A comprehensive estate plan can help transfer your hard-earned assets to your heirs and can help you reduce taxes. When you combine estate planning with gifting strategies, it can be a powerful combination that can yield many after-tax benefits for you, your family, and your favorite charities. Here are a few things to consider:

Understanding Gifting Strategies

It’s often beneficial to give assets to your loved ones while you’re still alive rather than after you pass away. This approach allows your loved ones to benefit from your gifts right away and gives you the enjoyment of seeing your gifts improve their lives. Additionally, those gifts can grow in value in their hands, rather than yours, which helps reduce your taxable estate.

Annual Gift Tax Exclusion

In 2023, you can gift up to $17,000 per recipient annually without incurring any gift tax. This allows you to reduce the size of your taxable estate while helping your loved ones today. For example, if you have three children, you and your spouse can gift up to $102,000 annually ($17,000 x 3 x 2) without any tax implications. The recipient typically owes no taxes and doesn’t have to report the gift unless it comes from a foreign source.

However, if your gift exceeds $17,000 to any person during the year, you will need to report it on a gift tax return (IRS Form 709).

Spouses splitting gifts must always file Form 709, even when no taxable gift is incurred. Once you give more than the annual gift tax exclusion, you begin to use your lifetime gift and estate tax exemption.

Lifetime Gift and Estate Tax Exemption 2023

With the passage of recent tax laws, the gift and estate tax exemption has increased significantly. For 2023, the lifetime gift and estate tax exemption is $12.92 million. This unified credit allows you to gift substantial assets tax-free during your lifetime or through your estate.

However, this exemption is temporary and only applies to tax years up to 2025. Unless Congress makes these changes permanent, after 2025, the exemption will revert to the previous limit of $5.49 million (adjusted for inflation).

For most people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. For those who have acquired enough wealth to surpass the gift and estate tax exemption, there are several strategies that could lock in the $12.92 million exemption. One simple way is to gift your assets to your loved ones now, rather than waiting until you pass away.

Tax-Free Gifting Strategies

There are several ways to give assets tax-free, including:

Making Direct Payments to Medical and Educational Providers

You can make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift or affecting your $17,000 gift exclusion. This method is a great way to help a loved one with large medical bills from an illness or to help pay for a family member’s education.

Contributing to a 529 College Savings Plan

You can contribute to a 529 college savings plan with your annual $17,000 gift tax exclusion. What is unique here is that you can lump five years’ worth of gifts into one year, $85,000 for single or $170,000 if married, as long as no additional gifts are made over that five-year period.

Using Irrevocable Trusts

One concern many people have about giving assets away early is that sometimes the person receiving the gift may not be ready to handle the responsibility of managing such a large amount of money. One way to give those assets, but protect them from misuse, would be to give them to an irrevocable trust and make the child or teenager the beneficiary. This method allows you to set the rules of the trust and determine how the assets will be invested and distributed.

Advanced Gifting Strategies

Donor Advised Funds

A Donor Advised Fund (DAF) allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. This is a flexible and efficient way to manage charitable giving.

Charitable Remainder Trusts

A Charitable Remainder Trust (CRT) can provide income for you or other beneficiaries for a period of time, with the remainder going to a charity. This strategy offers income tax deductions and can help reduce estate taxes.

Family Limited Partnerships

A Family Limited Partnership (FLP) can help manage family-owned businesses or investments. This strategy allows you to transfer interests in the partnership to family members, potentially reducing the taxable value of your estate.

Minimizing Tax Implications for Recipients

Understanding Cost Basis Transfer

One thing to remember about the assets you gift is that your cost basis will transfer over to the recipient. So, if that asset has appreciated in value significantly prior to the gift, the recipient could incur a substantial taxable gain when selling that asset.

Highly appreciated assets that are received as part of an estate, on the other hand, generally get a “step up” in basis (resetting the cost basis at the current market rate), which means a taxable gain could be avoided if the asset is sold soon after being received.

Benefits of Step-Up in Basis for Estate Transfers

To minimize the impact of taxes, carefully select what assets you gift. In general, cash and assets with little appreciation are better for gifts, while highly appreciated assets are better to transfer as part of your estate.

Proper Management of Gifts

Setting Up Irrevocable Trusts

One way to pursue that gifts are used and managed properly is by setting up irrevocable trusts. This allows you to set the terms and conditions for how the assets are to be used, invested, and distributed. For example, you could create a trust that stipulates the beneficiary can only have access to the income generated by the assets, or you could set specific rules such as requiring the beneficiary to graduate from college before having access to the funds.

Creating Conditions and Rules for Beneficiaries

Structuring trusts with specific conditions can lead to assets being used as intended. This can help provide the confidence that your loved ones will benefit from your gifts responsibly.

Planning for Future Tax Changes

Preparing for Changes in Gift and Estate Tax Laws

Tax laws are subject to change, and it’s important to stay informed about potential adjustments. Working with a financial advisor can help you adapt your strategies to remain effective under new regulations.

Strategies for High Net Worth Individuals

High net worth individuals may need to employ more sophisticated strategies to manage their estates effectively. Techniques such as GRATs (Grantor Retained Annuity Trusts) and IDGTs (Intentionally Defective Grantor Trusts) can be considered.

Conclusion

Combining estate planning with gifting strategies can help reduce taxes and preserve your assets during a transfer to your loved ones. It’s important to stay informed about the current tax laws and to plan accordingly. Consulting with a tax and estate planning professional can help you design an effective gifting strategy.

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Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.

This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction

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