Navigating Gift Tax in Estate Planning
Welcome to our comprehensive run-down on the ins and outs of gift tax! At Craig Associates, PC, we understand that understanding tax laws is no walk in the park and are here to help simplify topics like the purpose of gift tax, federal gift tax laws, and gift tax rates.
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My experience with Craig Associates, PC was very positive. I attended an informational seminar at their office in the Southside of Asheville which answered many questions in advance. They helped me to create an estate plan, living will, and health care power of attorney (HC PoA) for my end of life planning.
Along with the estate plan are detailed instructions on how to transfer all my property into my trust. This will simplify the disbursement of my property when I am gone and should prevent probate. Chris will be available to my trustees to aid them in this. My family is thrilled that I took the time to spell out my wishes for the end of my life in my living will to save them the anguish of making the decisions. We are all sleeping better at night.
Chris, Shelly and Justin were pleasant to work with and very efficient. I especially appreciate that they bent over backwards to meet my schedule as I had surgery planned and needed my HC PoA and Living Will in place before the surgery. I would definitely recommend Craig Associates for your Estate Planning, Living Wills and Health Care Power of Attorney. Sleep peacefully!Elaine S. | Asheville, NC
Here are terms you may come across in gift tax in estate planning research.
Taxpayer: An individual, business, or other entity responsible for paying taxes.
Interest: The money earned over time.
Basis: The original value of an asset to help determine how much tax is owed when it is sold (capital gain tax).
Inflation: How the value of money and assets increases or decreases over time.
Taxable Gifts: Gifts that exceed the annual exclusion amount and are taxed.
Estate Tax Return: The tax return filed after a person’s death.
Inheritance Tax: Tax paid by beneficiaries on their inherited assets if applicable by state law.
Applicable Exclusion Amount: The amount you can give away tax-free during life or upon death.
Gift Tax Planning: Strategies to reduce or avoid paying gift tax.
Generation-Skipping Transfer: This is when you leave wealth to your grandchildren, skipping your children.
Annual Exclusion Amount: The amount you can give away per year without incurring gift tax, key in gift tax planning.
Tax Cuts: Changes in tax laws that may reduce how much taxes you owe.
Unified Credit: A tax credit that reduces gift and estate tax.
Valuations: The estimated worth of your assets, and it affects estate tax, capital gain tax, and gift tax calculations.
Estate Taxation: The tax due when someone passes away and leaves an estate above a certain value.
Investment Adviser: A professional who gives advice on investments to increase wealth.
Marketability: How easy it would be to sell an asset.
Revocable Trusts: Trusts that can be changed or terminated during the grantor’s lifetime.
Donor-Advised Fund (DAF): A fund where the donor receives an immediate tax break.
Registered Investment Advisor (RIA): A person or firm that advises wealthy individuals on investments.
Charitable Remainder Trust: Charitable trusts provide income for a certain period of time before the remainder goes to charity.
Family Limited Partnership (FLT): A type of partnership used to organize family businesses or investment accounts.
Qualified Personal Residence Trust (QPRT): A type of trust that can help you avoid counting the value of your home in your estate.
What is Gift Tax?
Gift tax is a federal tax owed when property, assets, or money is given to someone else. It was first designed to prevent high-income earners from transferring their assets during their lifetimes to avoid or minimize federal estate tax when they die.
The Federal Gift Tax Law
According to US federal law, any gift, whether cash, real estate, or any other valuable, is taxable if the value exceeds the annual gift tax exclusion limit set by the Internal Revenue Service (IRS)
The donor is typically responsible for paying the gift tax; however, the recipient may have to pay if the donor fails to pay the tax in some situations.
Gift Tax Rates
Gift tax rates vary depending on the value of the gift given; the IRS imposed a gift tax rate of 18% to 40% for gifts exceeding the annual exclusion limit for 2023.
Difference Between Gift Tax and Estate Tax
Gift tax applies to the transfer of assets during your lifetime, whereas estate tax applies to the transfer of assets after death. Both gift and estate taxes have exemptions above which the tax is typically imposed.
Gift Tax Exclusions
Annual Gift Tax Exclusion
The annual gift tax exclusion is the amount of money you can give to as many individuals as you want each year without having to pay gift tax—the limit pertains to the total value of gifts given in a year, not individual gifts. The exclusion amount can change from year to year, and the annual gift tax exclusion stands at $17,000 as of 2023.
Lifetime Gift Tax Exclusion
The lifetime gift tax exclusion is the total dollar amount you can give away during your entire lifetime without paying gift tax. This number can change year to year, so talk to your estate planning attorney about the current exclusions allowed per person or per married couple.
Gifts to Spouses
Any gift given to a spouse who is a U.S. citizen is exempted from gift tax, regardless of the value of the gift.
Gifts to Charities
Gifts made to qualifying charitable organizations are exempt from gift tax and may also be eligible for an income tax deduction.
Gifts to Medical Institutions
Gifts made directly to medical institutions for treatment are excluded from gift tax—payments must be made directly to the institution or providers, not to the individuals benefiting from them.
Gifts and Tuition Fees
Paid tuition fees for someone else aren’t taxed if the payment is made directly to their educational institution—the beneficiary can’t reimburse you and still qualify for this exclusion.
Gift Taxes in Estate Planning
Gift taxes in estate planning can minimize tax implications and provide valuable resources to your children (heirs) or those who need it most.
Using Annual Exclusions
This strategy can decrease the taxable estate over time, potentially saving thousands in future taxes. It is essential to keep track of these gifts and the overall amount given to ensure tax obligations do not suddenly come up down the line or deplete resources needed for future living expenses, health care needs, and other financial goals.
Taking Advantage of Lifetime Exclusion
This exemption gives you the opportunity to give gifts exceeding the annual exclusion limit, thus reducing your taxable estate without paying gift tax. Remember that the exemption amount can fluctuate depending on tax law changes, so potential policy changes should always be considered when strategizing.
Utilizing the Unlimited Marital Deduction
This deduction can be useful, particularly for married couples, when planning estate transfers or managing income and assets. That said, it should be used judiciously, with care taken to balance each spouse’s economic security and estate value.
Gift-Splitting Between Spouses
Gift splitting is another tax-savvy tactic for married couples. They can elect to split gifts they give to others to double the amount that can be given tax-free under the annual exclusion. But to employ this strategy, both spouses must agree to split the gift, and they must file a gift tax return to declare the split.
Setting up a Trust
For those interested in transferring significant wealth while maintaining some or all control over its use, setting up a trust is almost always the best bet. Trusts provide a way of passing substantial amounts of money or property tax-effectively while allowing you to dictate certain conditions for its use. There are several types of trusts, including a revocable living trust, irrevocable trust, and charitable lead trust.
Charitable contributions are a win-win strategy for reducing your taxable estate and contributing positively to society.
Learn more about gift tax in estate planning
Making the most of gift tax in estate planning requires early planning, mindful execution, and regular review to successfully align with your financial goals. Our professional estate planners can assist in navigating these strategies’ complexities and nuances to optimize the financial benefits of gift tax in estate planning and minimize tax implications. Call Craig Associates, PC at (828) 258-2888, or register for one of our free estate planning seminars to discover how gift tax in estate planning can benefit you and your family.