Many individuals look for ways to gift assets before death as part of their estate plans. Understanding key aspects of federal gift tax rules, how gifts impact estate taxes and utilizing the unlimited marital deduction can help minimize tax liability.
Annual exclusions and lifetime exemptions: Under the IRS tax code, individuals can make annual tax-free gifts up to the annual exclusion amount to any recipient. In 2023, this amount is $17,000 per person per year. Lifetime tax-free gifting is also possible by utilizing one’s gift and estate tax exemption, which was $12.92 million per person in 2023 (this exemption is set to change after 12/31/2025). Even gifts above these amounts may not incur gift tax due to the marital deduction.
Taxable gifts and estate taxes: Gifts to any recipient utilizing the gift tax exemption (over $17,000 a year for 2023) become “taxable gifts.” These start to use up some of that $12.92 million exemption when totaled. The value of lifetime taxable gifts then gets added back to a person’s estate for calculating estate taxes after death. So large taxable gifts can reduce the future value of assets in one’s taxable estate.
Gift taxes and state rules: Beyond federal gift tax exclusion amounts, a few states have different gift tax regimes. For example, Connecticut and Minnesota set lower limits for annual tax-free gifting at $15,000 and $16,000 respectively. Other states have extra exclusions for gifts made to political groups, universities or spouses. Complex gifts may trigger state gift tax even if they do not incur federal gift taxes.
Marital deduction: One unlimited gifting exemption exists between spouses. Qualifying spousal gifts can deduct 100 percent of gift value regardless of amount under the marital deduction rules. These gifts do not use federal or state gift/estate tax exclusions. To qualify, proper titling/documentation must establish gift intent and spousal ownership rights. Spousal trusts can also utilize marital deduction. Smart gifting and trust strategies between married couples can completely avoid gift taxation.
Lifetime gifts & final estate tax: After the original owner’s death, the value of large taxable gifts made within three years before death gets added back to estate assets for calculating federal estate taxes. As a result, proper planning should usually aim to complete large “taxable” gifts more than three years prior to passing away to exclude value from final estate taxes. Lifetime gifting management therefore remains an important component alongside conscientious estate planning strategies.
In summary – understanding annual exclusions, lifetime gift tax exemptions, state gift rules, the spousal deduction provision and how taxable gifts factor into estate taxes allows creating customized gifting and succession plans to potentially reduce overall tax liability for high-net-worth donors.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.
This article is provided by your local estate planning attorney, Corina Colan.
The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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