Gifting your assets to your beneficiaries while you’re still alive can be a great way to take control of your estate plan, but if you’re not careful, you can run into some serious tax issues. The government imposes a charge—known as a gift tax—on assets that are given to another person with nothing received in return. Luckily, there are exemptions to this tax, and knowing how to use them is the key to smart estate planning. But acting fast is key: a major tax provision is set to expire at the end of 2025, which could throw a major wrench in your plans.
How the Gift Tax Works
The IRS taxes any assets that you give to another person either for free or for less than their full value. Known as a gift tax, this penalty applies whether or not the asset transferred is considered a gift. Luckily, there are exemptions that help you navigate this tax.
You are allotted both an annual gift tax exclusion and a lifetime gift tax exemption. In 2024, the annual gift tax exclusion amount allows individuals the opportunity to give gifts up to $18,000 per recipient ($36,000 for married couples) without triggering gift tax implications. You also have a lifetime exemption of $13.61 million ($27.22 million for married couples.) Anything you give up to those limits will not be taxed. However, these limits, which were doubled to their present numbers thanks to the 2017 Tax Cuts and Job Act (TCJA), are set to expire at the end of 2025. Unless Congress takes action to extend the act, these exemptions will be cut in half.
How to Take Advantage of the Lifetime Gift Tax Exemption
With the current uncertainty surrounding tax legislation, leveraging the lifetime gift tax exemption presents a strategic opportunity for estate planning. Given the potential changes in tax laws, now is an opportune moment to assess whether your estate might face future tax liabilities. By utilizing the lifetime gift tax exemption, individuals can transfer assets to their heirs tax-free, thereby reducing the overall value of their estate subject to potential estate taxes. For reference, if you were to pass with an estate that was greater than the tax exemption, your loved ones would be hit with a severe estate tax, with rates up to 40 percent.
It’s prudent to review your estate plan with a qualified financial advisor or estate planning attorney to explore how you can maximize this exemption while taking advantage of current tax laws and preparing for any future changes. By acting proactively, you can secure the financial well-being of your loved ones and potentially minimize tax burdens on your estate.
Contact the Experienced Professionals at Santa Barbara Fiduciary
At Santa Barbara, we know that everyone’s estate situation is different, and we’re here to help you navigate what can be a complicated process. Contact us today by filling out the form below and start protecting your future.
