Maximizing Tax Benefits Through Strategic Gifting

The gift tax exclusion is an invaluable tool for high-net-worth families looking to transfer assets to family members and loved ones without incurring significant tax liabilities. As 2023 draws to a close, wealthy individuals often utilize the annual exclusion to make strategic gifts, considering the impending end of the increased lifetime exemption, which provides another compelling reason to take action now.

Strategic Annual Gifting

With federal estate tax rates ranging from 18% to 40%, annual gifting presents a compelling strategy for reducing the size of a taxable estate. This strategy becomes even more significant when transferring assets expected to appreciate in the short term or subject to substantial valuation discounts, such as lack of marketability or control.

The annual gift tax exclusion for 2023 is $17,000 The annual gift tax exclusion for 2023 is $17,000 per recipient, providing a tax-free gifting opportunity. Additionally, married couples can collectively gift $34,000 to the same recipient, effectively reducing their combined estate by this amount.per recipient, providing a tax-free gifting opportunity. Additionally, married couples can collectively gift $34,000 to the same recipient, effectively reducing their combined estate by this amount. Notably, for 2024, the annual gift tax exclusion is set to increase to $18,000 per recipient, offering even more flexibility for high-net-worth taxpayers.

Furthermore, leveraging annual gifting can yield substantial benefits. For example, if both spouses gift to 10 grandchildren in 2023, they can collectively remove $340,000 from their estate. Moreover, by strategically timing gifts in December 2023 and January 2024, the amount removed from the estate can be more than doubled.

Individuals making gifts exceeding the $17,000 limit to a single recipient will need to file IRS Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return.” Importantly, each spouse must file separate returns as joint returns are not available for gift taxes.

Considerations Regarding Lifetime Exemption

Exceeding the annual exclusion doesn’t incur immediate taxes but does reduce the available lifetime gift and estate exemption upon the giver’s death. In 2023, the federal exemption stands at $12.92 million ($25.84 million for married couples), impacting the computation of estate tax based on taxable gifts and the gross estate. Notably, for 2024, the federal lifetime gift and estate exemption increases to $13.61 million ($27.22 million for married couples), offering high-net-worth families enhanced flexibility in estate planning. (More on this topic from Nerd Wallet.)

It’s crucial to note that the current exemption provided by the Tax Cuts and Jobs Act of 2017 is scheduled to sunset after 2025. This may necessitate careful estate planning for families to maximize benefits, especially considering the potential reversion to a lower exemption level absent Congressional action.

Important Considerations

High-net-worth families should be mindful of state-specific estate or inheritance taxes, which may apply at lower thresholds than federal regulations. Understanding state-specific rules is essential to avoid unexpected tax liabilities or unintended consequences of asset transfers.

Eligible Transfers and Estate Planning

Families should note that not all asset transfers constitute “gifts” under IRS regulations. The federal gift tax applies to various forms of property transfers, including cash, real estate, stocks and bonds, business interests, vehicles, collectibles, digital assets (such as NFTs and cryptocurrencies), and specific transactions like forgiveness of debt or property settlements in divorce litigation.

Additionally, you can strategically exclude certain expenses from the gift tax, such as tuition payments made directly to qualifying educational organizations, contributions to 529 plans, and medical expenses paid directly to medical providers.

Strategic Estate Planning

As families navigate the complexities of gifting and estate planning, it’s essential to carefully consider the implications of annual gifting and the evolving lifetime exemption. Proactive planning can maximize tax benefits for while safeguarding assets for future generations.

Sol Schwartz & Associates assists numerous high-net-worth individuals and families in crafting comprehensive plans that optimize tax benefits for both current and future generations.

If you have any questions or require further assistance, feel free to reach out to us for personalized guidance tailored to your unique financial circumstances and objectives. Just leave us your contact information below and we will get back to you promptly.



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