It’s the end of the year and many of us are thinking about making gifts to people we care about. Many of us are also thinking about creating or changing our estate plans. It might be in your best interest to make sizeable gifts during your lifetime to the intended beneficiaries of your estate.
Federal Estate Tax
Some states have a state estate tax that is applied to estates over a certain amount. There is no estate tax in the State of Arizona, but the federal estate tax still applies.
For deaths in 2023, the federal estate tax exemption is currently $12.92 million per person. That means you can die with $12.92 million in total assets and your estate will not be taxed. If you are a married couple, your combined estate can equal twice that amount without being taxed.
The federal estate tax exemption was $5 million per person in 2017. The federal estate tax exemption is set to revert to the 2017 amount as adjusted for inflation in 2026. Congress can still change this prior to 2026.
It is important that you share accurate information regarding your assets with your estate planning attorney so they can make recommendations based on the federal estate tax exemption. You should stay aware of changes that might give you a taxable estate, even if you are unlikely to have a taxable estate at the time of creating your estate plan. Your estate could become taxable by the growth of your estate or shrinking of the estate tax exemption.
One way to avoid having a taxable estate is to make gifts during your lifetime. You may give $17,000 per year per person without having to file a federal gift tax return. There may $17,000 per year to each of your intended beneficiaries if your estate is near the federal estate tax exemption. You can still gift more than $17,000 and may not incur any gift tax liability. But you will need to file a federal gift tax return.
Of course, there are reasons to make a gifts during your lifetime other than estate planning reasons. Making a lifetime gift would allow you to actually see your beneficiary enjoy their gift. How much satisfaction you gain from lifetime gifting will depend on you and your relationship with your intended beneficiary.
Gifts to minors can also be made to a §529 Plan College Education Fund. Future income from §529 Plans is tax free as long as withdrawals are used for education. Gifts to disabled individuals can be made to a §529(A) ABLE Act account. The current annual limit for deposits to an ABLE Act account is $17,000 from all sources combined.
The IRS announced that the annual gift tax exclusion amount of $17,000 will increase to $18,000 in 2024 due to inflation. However, the IRS also noted that the gift tax exclusion amount is scheduled to revert to the pre-2018 amount of $14,000 in 2025. You should stay aware of future changes to the annual gift tax exclusion amount.
If your estate could reach the federal estate tax exemption amount, you may consider making a gifts to your intended beneficiaries during your lifetime. Your estate may benefit from making lifetime gifts to your intended beneficiaries, and you may experience some personal satisfaction, as well.
For more on making end of year gifts, check out our 2020 podcast episode on the same topic.