There are many reasons why estate planning is essential. However, one of the main reasons we call out in that article is the idea of protecting yourself (or your beneficiaries) from a significant tax hit. Luckily, lifetime gifting can help reduce your overall estate tax burden.
Here are a few things you can do to lessen your estate taxes.
How to Take Advantage of Gift Tax Exclusions
As of 2022, you can give someone up to $16,000 free and clear. No tax implications at all. If it’s a married couple, you can give them up to $32,000.
So think about it like this – let’s say you have two grown children. Each one is grown and married with two kids of their own, meaning you have two children, two in-laws, and four grandchildren.
If you give $16,000 to each of those eight people annually, you’re reducing your overall assets by $16,000 x 8 = $128,000! And that’s just your children and grandchildren. You may also want to give money to other people like your siblings, nieces, nephews, or friends.
The good news is that this isn’t your only way of reducing taxes with lifetime gifts. You can also take advantage of exemptions.
What is the Gift and Estate Tax Exemption
There’s a law called the Tax Cuts and Jobs Act that affected gift and estate tax exemptions. Essentially, it lifted the limits to be much more than before the law passed.
There used to be an exemption of up to $5.49M. With the passage of TCJA, that limit is now up to $12.06M. This expires in 2025, but it’s something to keep in mind over the next few years.
There are two ways for you to take advantage of the exemption.
- If you give your assets to your friends and family now, you can see them benefit from the gifts now. Pay off debt, go to college, get great cars, and more.
- Giving your assets allows the assets to grow for your loved ones and reduces your taxable estate.
If you don’t give the money to your loved ones now, what happens if your assets grow over the $12.06M and you pass away? The excess will get taxed. But if you had given the assets to your loved ones now, the asset growth wouldn’t get taxed.
How to Take Advantage of Educational or Medical Tax Exemptions
Suppose you pay an educational or medical institution on behalf of someone else. In that case, it doesn’t count towards your annual $16,000 gift limit.
For example, let’s say you have three grandchildren in college. The tuition for each is $20,000 a year, bringing the total tuition to $60,000 per year. So you can actually pay the entire $60,000 plus gift each one $16,000.
Or let’s say your sibling had surgery and ended up with $50,000 in medical bills. You can pay off their debt and give them $16,000 to help them stay afloat as they recover.
How do these types of things help from a tax perspective? It lowers your estate and how many assets you’ll pass on to your loved ones. Using these examples, you would’ve reduced your estate by
- $60,000 due to the educational payments
- $48,000 due to gifting money to your grandchildren
- $50,000 due to your sibling’s medical bill
- $16,000 due to gifting your sibling
That comes out to $174,000. That’s a significant reduction in an estate that won’t have to be taxed now.
Do you have other questions about lowering your estate tax with lifetime gifting? Send us an email or call us at 714-663-8000. We’d love to answer any questions you have.