Whether you give vehicles, cash or stocks to someone, the government may want to collect some taxes. Luckily, you can transfer assets and their appreciation out of your estate sooner rather than later. Doing so will exclude a large portion of your estate or gifts from taxation.
There are numerous options for giving assets tax-free. For example, you can use the lifetime estate and gift tax exemption. Make direct payments to educational or medical providers on behalf of a loved one. Or, use the annual gift tax exclusion.
Generally speaking, giving assets to loved ones while you’re still alive is better than after you pass away. Doing so allows you to see how your gifts improve their lives. Additionally, it will help reduce your taxable estate because the gifts grow in value in the recipients’ hands rather than yours.
How The Lifetime Estate and Gift Tax Exemption Works
With the enactment of the Tax Cuts and Jobs Act (TCJA), the lifetime estate and gift tax exemption has nearly doubled. Previously $5.6 million for individuals and $11.18 million for couples, is now $11.18 million for individuals and $22.36 million for couples. And for 2023, the current exemption is $12.92 million per person and $25.84 million for a married couple.
If you’re considering giving assets, be aware that the lifetime estate and gift tax provisions in the 2017 TCJA are scheduled to expire at the end of 2025. So, they will revert back to 2017 levels if nothing changes between now and then. As such, the exemption might decline to something like $6 million per individual and $13 million for a married couple. Of course, this depends on inflation over the next few years.
Albeit there could be new law between now and 2026, that’s not something you should wait for. Instead, it’s wise to review your estate plan now with the knowledge that the TCJA provisions could expire.
Locking In The Exemption
You can take advantage of this tax exemption by transferring wealth from one generation to the next. If your wealth exceeds the exemption, there are various strategies that could lock in the $12.92 million exemption.
The easiest way is not waiting until you pass away, but by gifting assets to your loved ones now. For instance, if you gift the entire $12.92 million to your grandchildren today, that money will grow over time. Using a hypothetical investment growth of 4% per year for 10 years, that $12.92 million gift could end up being worth over $19.12 million. And your loved ones will have received the entire amount free from estate or gift taxes.
In contrast, if you keep those assets and pass away in 10 years, a large portion of the $19.12 million would be taxed at 40%. Moreover, the tax exemption will have likely reverted to the lower amount for dates after 2025. As a result, your estate may end up paying millions of dollars in federal taxes, leaving your heirs with a much smaller after-tax gift, rather than the $19.12 million had you made the gift sooner.
Other Ways To Give Tax-Free
Another way to give tax-free is by making unlimited payments directly to educational institutions or medical providers on behalf of others for qualified expenses. Not only will you not incur a taxable gift, but it will also not affect your $17,000 gift exclusion. In addition to help paying for a family members education, this method is a great way to help a loved one with large medical bills.
Don’t wait too long before using your lifetime estate and gift tax exemption. Meet with one of our tax and estate planning professionals to ensure your estate and gift plans are well thought out and properly implemented.
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