How Gift Taxes May Affect Your Estate Planning Strategies

For people with a high net worth, the estate planning process may involve a variety of complex concerns. It will be important to take steps to protect one’s assets and ensure that as much wealth as possible can be transferred to future generations or used to support charitable causes. One of the most important aspects of asset protection will involve minimizing the taxes that apply when an estate is transferred. Gift taxes and gift tax exclusions are a crucial factor in a high-net-worth estate plan. An experienced attorney can provide guidance when addressing complex issues related to estate and gift taxes, and they can develop strategies that will allow as much wealth as possible to be preserved and passed on.

Understanding Gift Taxes

Gift taxes are federal taxes applied to the transfer of property or money while the giver is still alive. However, these taxes will only apply to amounts that exceed the exemptions that are available. The key to incorporating gift-giving into estate planning is understanding gift tax exemptions and how to use them strategically to reduce the taxable value of an estate.

Annual and Lifetime Gift Tax Exemptions

The IRS allows each person to give away a certain amount of money or property each year without incurring gift taxes. For 2024, the annual exclusion amount is $18,000 per recipient. This means that a person can give away up to $18,000 to as many people as they wish each year without being required to pay taxes. A married couple may give away up to $36,000 per year per person.

For gifts that exceed the gift tax exemption amount, the lifetime gift tax exemption may be used. This exemption applies to gifts that exceed gift tax exemption and also to estate taxes that will apply after a person passes away. As of 2024, the lifetime exemption amount is $13.61 million. Over a person’s lifetime, they can use some or all of this exemption when giving gifts. Any remaining part of the exemption that has not been used will be used as the estate tax exemption after the person’s death.

Strategic Use of Gifts in Estate Planning

Gifts can play a pivotal role in reducing the size of an estate and minimizing the estate taxes that will apply after death. By making annual gifts, the value of an estate can be incrementally reduced, with the goal of ensuring that the total value of the estate will be lower than the estate tax exemption after the person’s death.

For example, a married couple may give annual gifts to each of their children. If they have three children, each child may be gifted up to $36,000 per year without the requirement to pay gift taxes, allowing the value of the estate to be reduced by $108,000 annually. If this pattern of gift-giving continues for 10 years, the total value of the estate can be reduced by $1.08 million. Additional gifts to other parties may also be used to further reduce the value of the estate, limiting the amount of estate taxes that will need to be paid after the death of either or both parties.

Potential Changes in Exemptions

It is important to note that tax laws are subject to change. In 2017, the estate tax exemption was increased significantly. However, this increase is set to revert to a lower amount after 2025 unless new legislation extends the current exemption levels. If this exemption is reduced, the lifetime gift tax exemption will be lower, and the possibility of paying estate taxes after death will increase. However, for gifts made in 2025 or earlier, the increased lifetime exemption will apply, so it may be beneficial to make larger gifts while higher exemptions are available. 

Contact Our Naperville Estate and Gift Tax Planning Lawyer

As you plan for how to protect the wealth you have accumulated and ensure that it will be used to meet the needs of yourself and your loved ones, you can work with the experienced DuPage County estate planning attorney at the Gierach Law Firm. We will advise you on how you can protect against losses, use your assets to provide for your comfort as you get older, and leave a lasting legacy that will benefit your family and others. Contact our firm at 630-228-9413 to schedule a consultation.