People who have achieved professional success or who have benefited from intergenerational wealth may have a substantial estate to pass on to others when they die. Estate planning for a successful adult requires more careful consideration than a traditional middle-class estate plan.
People who want a portion of the estate might come out of the woodwork after an individual dies. Additionally, there is reason to worry about estate taxes if someone has more than $13.61 million in assets. Seeking to reduce the value of an estate before an individual dies is a common tax avoidance strategy.
Testators thinking about the legacy that they leave might decide to make generous gifts to some of their beneficiaries. Doing so allows them to witness their loved ones enjoying their inheritance while they are still alive and can diminish the value of their estate.
How can regular gifts influence estate planning and tax responsibilities?
Annual gifts can diminish estate value
Making gifts to loved ones is a common estate planning strategy. Every year, the Internal Revenue Service (IRS) announces a maximum exempt gift amount. In 2024, an individual can give another person up to $18,000 worth of cash or property without triggering gift taxes.
Gifts over that amount are potentially subject to gift taxes. The person making the gift can extend gifts to as many friends and loved ones as they want annually without tax obligations as long as no one party receives more than the exempt amount. Particularly in cases involving large families, regular gifts can help to significantly diminish the value of an estate and might help a testator avoid or at least substantially reduce estate tax obligations.
Recent gifts can contribute to estate value
If there is one concern when using gifts to diminish estate value, it may be how the most recent gifts someone makes could contribute to the value of their estate after they die. When calculating the value of an estate for tax purposes, it is necessary to look at the last three years of gifts and transfers.
Therefore, it is usually better to plan to make generous gifts earlier in retirement instead of ramping up gift-giving later in life. In some cases, generous gifts might push an estate back over the threshold for estate taxes. Testators may find that a combination of tax avoidance strategies, including the use of trusts in addition to gifts, can do the most to help reduce tax liability.
Learning more about how different taxes may affect estate planning can be beneficial for those hoping to maximize how much of their good fortune passes directly to their beneficiaries. Strategic gifts can be one way to diminish the value of an estate and limit tax risks.