Understanding Lifetime Limits and Gifting is Essential

Key Takeaways:
  • The $13.9 million lifetime gift tax exemption may change after 2025.
  • Direct payments for tuition or medical expenses reduce estate size tax-free.
  • Regular estate plan reviews keep assets titled correctly and tax strategies effective.

 

Estate planning is an important aspect of financial management, especially in light of the Tax Cuts and Jobs Act (TCJA) of 2017. This legislation significantly increased the estate tax exemption. But with the expiration of key TCJA provisions at the end of 2025, the landscape is set to change dramatically. Congress and the new administration are expected to extend or make permanent some of those TCJA provisions, but how the changes may be shaped and whether they will be long-term is still unknown.

Understanding these changes and planning accordingly to reduce the size of your estate to avoid tax liability is important for individuals at various wealth levels.

Understanding Lifetime Limits & Gifting

A significant aspect of estate planning is understanding the lifetime gift tax exemption and annual gifting limits.

What is the lifetime gift tax exemption? Just as it sounds, it is an amount of money the IRS allows you to gift to other people over the course of your lifetime without incurring a gift tax. For 2025, that amount is $13.9 million per individual. On an annual basis, you may gift up to $19,000 per recipient without affecting that lifetime exclusion or reporting it to the IRS. However, if you gift $19,001 or more, you must report it to the IRS. You won’t owe a gift tax, but it will count against your lifetime gift tax exclusion.

Many people are unaware of these limits or do not take full advantage of them for the purpose of moving cash assets out of their estates. Additionally, charitable contributions and certain other transfers, such as those between spouses, do not count against the lifetime exemption.

Using these strategies can help individuals reduce their taxable estates. For example, paying qualifying medical expenses or tuition directly to the provider or institution can move money out of the estate without impacting the lifetime gift tax exclusion. This approach is a win-win, as it reduces the estate size while providing financial support to loved ones.

Challenges

Planning for certain taxpayers is particularly challenging due to the variability in their asset makeup and personal goals. It is also important to consider when gifting assets to understand that basis transfers from donor to donee. Inheriting assets results in a step up in basis for the donee. Effective planning must balance the need to maintain cash flow, lifestyle with the desire to minimize estate taxes as well as whether a step up in basis is desirable. This requires a thorough understanding of the assets involved and careful consideration of future needs and family dynamics. It is sometimes important to get growth out of an estate with the loss of a step up. Other times, it is best to give assets that will not change in value.

What is Not Considered a Gift?

Certain transfers are not considered gifts and do not reduce the lifetime exemption. These include:

  • Transfers between spouses
  • Gifts to charity
  • Political contributions (though they do not provide a tax deduction)
  • Payments for qualifying medical expenses made directly to the provider
  • Tuition payments made directly to an educational institution

Understanding these exclusions can help in planning how to spend down an estate – and minimize exposure to estate tax – without impacting the lifetime gifting exclusion.

Risks & Considerations

When planning to reduce an estate, it is important to ensure that you do not spend down more than you can afford. Consider how much you will need to maintain your lifestyle and cover unexpected expenses. Family dynamics and business needs can influence your decision making and the type of planning vehicle used.

Additionally, consider your overall goals for your estate. What do you want to have happen to your farm or your business? Are there changing family needs to consider?

Estate plans can become outdated if not reviewed every three to five years to ensure they remain relevant.

Changes in family configuration, business needs and personal goals can necessitate adjustments to the plan.

The Importance of Proper Titling of Assets

Many clients utilize trusts to move assets out of their estates and reduce their exposure to the estate tax, but they fail to retitle assets into the trust, which can undermine the effectiveness of the plan. Understanding how assets are titled is a key aspect of effective estate planning. Proper titling is essential to ensure that assets are correctly included in the estate plan.

Creating personal financial statements that detail the assets owned and how they are titled can provide clarity and ensure that the estate plan is comprehensive. This includes listing homes, vehicles, art, jewelry, household goods, collectibles and farm equipment, among other assets.

Key Considerations for Strategic Gifting

  • Know what doesn’t constitute a gift: Understanding exclusions can help in planning how to reduce the estate size without impacting the lifetime gift tax exemption.
  • Understand annual and lifetime limits: Detailed knowledge of these limits is crucial for effective planning.
  • Know what is included in the gross estate: Personal financial statements can help identify all assets that will transfer to a spouse or heirs.
  • Take advantage of gifting now: With the current high exemption limits, it is an opportune time to lock in assets that will appreciate and grow. Waiting until the exemption drops could mean leaving significant value on the table.
  • Plan for long-term tax consequences: Consider the long-term impact of estate taxes and work with professionals to develop a comprehensive plan. This includes the planning for the basis of assets in the hands of your beneficiaries.
  • Involve professionals: Attorneys, accountants and financial advisors should all be part of the planning process to ensure all aspects are covered.
  • Build flexibility into the estate plan: Plans should be adaptable to changes in tax laws, family dynamics and personal needs.

Ultimately, by understanding how strategic gifting can benefit an estate plan and by planning accordingly, individuals can ensure their estates are managed in a way that aligns with their goals and minimizes tax liabilities.

If you would like to discuss how strategic gifting can help manage your estate plan, contact an Adams Brown advisor.