The IRS levies the federal gift tax to keep people from avoiding federal estate taxes by giving away all their money and property before they die. Many Georgians with larger estates work with an estate planning attorney to develop a gifting estate planning strategy to reduce or eliminate the estate tax that will be owed upon their death by reducing the size of their estate.
This should be done carefully and under the advisement of an experienced estate planning attorney and/or financial advisor to ensure you are aware of all options and considerations, but we will break down some of the basics of what you need to know when building your gift-giving strategy.
Breaking Down the Current Numbers
According to the latest gift-tax updates from the IRS, the numbers and rates you should be aware of are as follows:
- In 2023 the maximum federal gift tax rate is 40%.
- The annual exclusion rate for 2023 allows you to gift up to $17,000 per year per person without paying gift tax.
- You and your spouse can jointly combine this annual exclusion to give up to $34,000 per person per year.
- In addition to the annual exclusions, the lifetime tax-free exclusion beyond the annual exclusions for 2023 allows people to gift up to $12.92 million.
- As a resident of Ga, there is no state gift tax levied, so you only need to worry about federal rates.
Once the lifetime credit is exhausted, gifts become taxable. But if a certain asset is appreciating, it will likely be cheaper for the family if gift taxes are paid now instead of estate taxes later.
Know Which Gifts are Not Taxable
Several types of gifts are not taxable and become part of people’s strategy to retain the maximum value of their estate without owing Uncle Sam. These include the following:
Charitable gifts: If you donate to a registered non-profit organization, the IRS may not treat it as a taxable gift. Confirm with a tax professional or financial advisor that the organization you intend to support qualifies for this tax exemption.
Money given to a spouse: As long as your spouse is a U.S. citizen, you can transfer any amount of cash and property to them tax-free. The IRS sets an annual limit. In 2023 that limit is
Jointly owned bank or brokerage accounts or U.S. savings bonds: Proceed with caution. While It is not considered a gift when another name is added as a joint owner, funds withdrawn on a joint fund will be treated as a gift. A better option might be to draft a Power of Attorney and/or make sure that bank accounts are held in the name of your revocable living trust.
Money to cover education tuition: Such gifts must be made directly to the educational institution, not the individual. Consider contributing out-of-pocket expenses like books, supplies, and living expenses to a 529 tax-advantaged savings plan. Speak with your estate planning attorney to learn what rules and benefits can apply when taking this route so you can make the highest possible tax-free contribution.
Qualified medical expenses: Treatment of disease, various medical procedures, medical and long-term care insurance, and transportation related to care all qualify as non-taxable if you pay directly to the institution or person providing the care.
Direct payments for products and services: Instead of gifting the money to an individual, make direct payments for big expenses like weddings, vehicles, vacations, and other high-ticket items. . Also, avoid giving loved ones an interest-free loan as, in the eyes of the IRS, this is considered a gift and taxes will be owed. Secured loans with a promissory note could be a better option if you wish to loan money directly.
Any “Present-interest” gifts up to the amounts specified by the annual exclusions noted above will not be taxed.
How to Approach Gifting Property
Give property that is expected to appreciate We already have seen how this estate planning strategy works. The idea is to get future appreciation out of the estate unless you need that property to maintain your standard of living. The more future appreciation that is outside of the estate, the lower the total estate and gift taxes are on the family’s total wealth.
Retain appreciated assets for your estate: If you’ve considered gifting highly appreciated assets (like an investment property) while you’re still alive, note that this will lead to your heirs paying a higher Capital Gains tax on the appreciated value. Waiting to distribute that property to your heirs through a trust means that, after your death, your heirs will receive a step-up in basis when they sell it, saving them a lot of money in taxes.
No one gets to deduct the loss if you gift a property you own that has declined in value. Instead, you may consider selling the property and deducting the loss on your tax return and gift the cash from the sale through a trust.
Other Do’s and Don’ts of Gift-Giving
Give early in the year. Most people wait until the end of the year to make annual gifts. But giving early in the year takes any income generated from the property off your tax return, increasing the total wealth you can give away. Giving gifts early also protects the receiver from anything that could happen over the course of the year that would prevent the gifts from being made later in the year. Essentially, the sooner you give property that is likely to appreciate, the more tax-free property can be gifted from your estate.
Increase the benefits across your family. Discuss with your estate planning attorney how to include contingent beneficiaries in your trust. You can make trust contributions up to the annual gift tax exemption amount for each beneficiary in some irrevocable trusts. If you set it up so that your children are the main beneficiaries of your estate, while your grandchildren are contingent beneficiaries. Your total tax-free contribution includes the $17,000 annual exemption across however many beneficiaries and contingent beneficiaries you have on the trust.
Be aware of the Kiddie Tax. For those who wish to move income-producing property from your higher tax bracket to a family member in a lower tax bracket. If investment income is earned by a child under age 14, only part of that is tax-free, and the rest is taxed at the parent’s highest tax rate. The Kiddie Tax doesn’t apply to children over 14, so if you’re giving the income-generating property, you may want to delay or lower the amount until the beneficiary is 14 or older.
And finally, remember to update your will and estate plan to reflect gifts already received, so your wealth is distributed according to your current goals.
Estate Planning and Tax Strategy are complex and unique to every individual. If you are looking for more resources and support to help build a savvy gift-giving strategy to maximize your estate, reach out to the team at Smith Barid today.