Article
Minimize Estate Taxes With Smart Gifting Strategies
September 6, 2024
When it comes to estate planning, the last thing you want is for the legacy you leave to your heirs to be subject to excessive taxation. With the Tax Cuts and Jobs Act expected to sunset in 2026, more estates will face federal estate taxes, which can be as high as 40%. Now is the time to think about reducing the size of your taxable estate to avoid unnecessary taxation. Implementing a gifting strategy can be a great way to kick-start the process. There are several straightforward pass wealth to the people in your life you wish to take care of, while also avoiding unnecessary taxation.
Annual exclusion gifts are one of the simplest ways to make tax-free gifts. In 2024, the Internal Revenue Code (IRC) allows individuals to gift up to $18,000 per person per year without triggering any gift tax consequences. A married couple can combine their annual exclusions and pass down a maximum of $36,000 to each recipient annually. This is a powerful way for parents or grandparents to pass down wealth to their family, but beyond that, the annual exclusion does not limit gifting to just lineal descendants. You can make annual gifts up to the exclusion amount to siblings, parents, friends, or anyone in your life you would like to help out.
Another straightforward strategy for making gifts is to cover an individual’s education and medical expenses. The IRC allows an individual to pay an unlimited amount toward another person’s education and medical expenses. Just be sure that the payment goes directly to the educational or medical institution. For grandparents, paying for a grandchild’s primary and secondary education tuition can be a significant benefit, reducing potential education debt and serving as a powerful gifting strategy to reduce their taxable estate.
A person can also fund another individual’s current or future education expenses without paying directly to the educational institution by contributing to a 529 Plan with the recipient listed as the beneficiary. The assets inside a 529 Plan grow tax-free and can be withdrawn tax-free as long as the amounts are used for educational or other qualified purposes. A 529 Plan gifting strategy can especially be effective for grandparents who want to start gifting to a grandchild when they are young. By making annual exclusion gifts to a 529 Plan from the child’s birth, you allow the funds to grow and compound tax-free over a much greater period. 529 plans also allow for “superfunding,” wherein an individual can make five years’ worth of contributions at one time. This means that a single individual could contribute $90,000 to their heir’s 529 plan without incurring any gift or estate taxes
Establishing a trust can also be a very efficient way of reducing your estate and passing wealth down to heirs. A trust can allow for specific restrictions on the use of funds over time or give the trustee discretion to distribute funds to a beneficiary for any purpose. Parents and grandparents can utilize trusts for younger generations to reduce the size of their estates by using a grantor trust for income tax purposes. With a grantor trust, all income tax consequences flow directly to the grantor, or creator, of the trust, who then pays the income tax generated by the trust on their personal income tax return. Even the highest income tax rate is lower than the 40% estate tax, so this can allow for a more tax-efficient transfer of wealth to your heirs.
Gifting can be a powerful tool to fulfill any wishes to pass on wealth to your heirs while reducing your estate taxes. There are various options when it comes to gifting, each providing its own unique benefits. We can assist you in determining which options may be the best for your situation.
For more information on gifting options, please contact our financial planning team.
