There are a lot of financially successful people in our area, and this is a good thing in every way with one exception. When you have accumulated a significant store of wealth, you may face estate tax exposure. Gift giving would come to mind as a response, and we will look at the subject here.
Federal Estate Tax
Before we get into the matter of giving gifts to avoid taxation, we should provide the necessary background information. There is an estate tax exclusion that represents a certain amount that can be transferred tax-free. In 2022, it is $12.06 million. That amount is per person or er spouse.
This figure is in place because of a provision in the Tax Cuts and Jobs Act of 2017. This provision is going to sunset (expire) at the end of 2025. The next year, the exclusion will go down to $5.49 million (per person) indexed for inflation. This is the exclusion that was in place in 2017.
You can transfer unlimited assets to your spouse tax-free because of the marital deduction. One caveat is the fact that this exclusion is only afforded to American citizens. The exclusion is portable, so a surviving spouse can use their spouse’s unused exclusion.
Federal Gift Tax
The gift giving window of opportunity was open right after the estate tax was enacted in 1916. A gift tax was enacted in 1924, and it was repealed in 1926. It was reenacted in 1932, and it was unified with the estate tax during the 1970s.
As result of the unification, the $12.06 million exclusion is a unified exclusion. It applies to lifetime gifts along with the estate that will be transferred after your death.
Gift Tax Exclusions
In addition to the unified exclusion, there are three other gift tax exclusions that provide a limited ability to give tax-free gifts without using any of your unified exclusion. The most significant one is the $16,000 annual exclusion.
You can give this much to any number of people each year tax-free. If you are married, you and your spouse can combine your exclusions, and this is called “gift splitting” in estate planning and tax parlance. This means that you can give $32,000 to any number of people each year. These gifts can effectively reduce the size of your taxable estate without chipping away at your $12.06 million lifetime exclusion.
Let’s say that you are married, and you have four married children. You and your spouse can give a total of $32,000 to each husband and wife. If you do this, you can transfer $256,000 tax-free every year, and you will be reducing the value of your estate for tax purposes when you do it.
There is also an education exclusion. If you want to pay school tuition for loved ones, you can give the gifts without incurring any gift tax exposure. It applies to tuition only, but you can use your $16,000 annual exclusion to provide added support for books, fees, and living expenses.
In the same vein, there is a medical exclusion. Each taxpayer can pay medical bills for other people free of transfer taxes. It should be noted that the medical professionals have to be paid directly, and the same thing applies to school tuition.
Attend a Free Webinar!
You can come away with a great deal of important information in an efficient manner if you attend one of our webinars. The learning experience is invaluable, and you have an opportunity to make an initial connection with an attorney from our firm.
If you are interested, the dates of future webinars will be posted on our estate planning webinar page. Though the events are free, we ask you to register so we have an idea of how many people to expect. We also have an on demand webinar available on our website. This is available 24/7 and is updated periodically.
Ready to Act?
At some point, the learning process is over, and it is time to work with an attorney to put a plan in place. If that time is now, you can schedule an appointment at our Burbank, CA estate planning office if you call us at 818-937-2335.
We also have a contact form you can fill out, and if you reach out this way, we will get back with you ASAP.
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