How Can Clients Utilize Annual Gift Tax Exclusions in Estate Planning?

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    How Can Clients Utilize Annual Gift Tax Exclusions in Estate Planning?

    In the complex world of estate planning, leveraging annual gift tax exclusions can significantly enhance a client's financial strategy. Insight from a Real Estate Attorney reveals how aligning strategies with lifetime exemptions can be beneficial. Alongside expert advice, we present additional strategies, including simple-yet-effective annual gifting, to ensure a well-rounded approach to maximizing wealth transfer.

    • Align Strategies with Lifetime Exemption
    • Double Gifts with Gift Splitting
    • Directly Pay for Medical Costs or Tuition
    • Invest in Education with 529 Plans
    • Protect Assets with Irrevocable Trusts
    • Maximize Wealth Transfer with Annual Gifts
    • Manage Assets with Family Limited Partnerships

    Align Strategies with Lifetime Exemption

    One way we've assisted clients in maximizing their estate planning benefits is by aligning their strategies with the lifetime exemption. This exemption is an integral part of the unified gift and estate tax exemption and serves to shield gifts exceeding the annual gift tax exclusion from taxation. Presently, the exemption effectively safeguards up to $10 million from tax, with adjustments made for inflation. In 2021, this inflation-adjusted amount stood at $11.7 million, increasing to $12.06 million in 2022. However, it's worth noting that potential legislation changes could reduce this amount to $5 million, plus adjustments for inflation.

    It's important to understand that utilizing your lifetime gift tax exemption can diminish the available exemption for your estate. For instance, if you gifted $850,000 to family members in 2021, with $150,000 protected by the annual gift tax exclusion, your estate's available exemption for that year would decrease to $11 million ($11.7 million–$700,000).

    Michael E. Farah
    Michael E. FarahFounder, Realtor and Real Estate Attorney, The Farah Law Firm, P.C.

    Double Gifts with Gift Splitting

    One way I've helped a client is by implementing a strategy known as 'gift splitting.' Gift splitting allows a married couple to combine their annual gift tax exclusions, effectively doubling the amount they can gift tax-free to each recipient.

    For example, let's say the annual gift tax exclusion is $15,000 per person. By utilizing gift splitting, a married couple can jointly gift up to $30,000 per recipient without triggering gift tax consequences. This strategy enables the couple to transfer assets to their heirs or beneficiaries while minimizing their overall estate tax liability.

    I worked with the client to identify suitable gift recipients and helped them coordinate the timing and documentation of the gifts to ensure compliance with IRS regulations. By leveraging gift splitting and strategically gifting assets within the annual exclusion limits, the client was able to transfer wealth to their loved ones tax-efficiently as part of their estate planning strategy.

    Perry Zheng
    Perry ZhengFounder and CEO, Pallas

    Directly Pay for Medical Costs or Tuition

    Clients can smartly manage their estate taxes by directly paying for a loved one's medical bills or college tuition, as these payments do not count towards the annual gift tax exclusion. By doing this, they can help their family members without the amount being deducted from their yearly non-taxable limit. It's a thoughtful way to give substantial gifts that also carry personal significance, such as ensuring a grandchild's health or education is well taken care of.

    This method keeps the giver's estate size in check for future planning. Consider helping someone with their education or health costs today as part of your estate planning strategy.

    Invest in Education with 529 Plans

    Setting up a 529 plan can be a wise move for clients wanting to invest in their grandchildren's educational future without affecting their gift tax exclusion. By contributing to a 529 plan, they're not only expanding their grandchildren's horizons but also efficiently passing on wealth without immediate tax consequences. The investment grows tax-free, and withdrawals for qualified education expenses are also untaxed.

    This approach can help secure a child's future while also providing tax benefits. Reach out to a financial advisor to start funding a grandchild's 529 plan now.

    Protect Assets with Irrevocable Trusts

    Establishing an irrevocable trust can offer clients a form of asset protection and control beyond their lifetime. Once assets are in this type of trust, they are no longer considered part of the client's estate for tax purposes. They can set terms that dictate how the assets are managed and distributed, which can provide long-term stability and financial support to beneficiaries.

    These trusts also protect the assets from creditors and ensure they are used according to the grantor's wishes. Speak with an estate planner to explore how an irrevocable trust can be a part of your wealth preservation plan.

    Maximize Wealth Transfer with Annual Gifts

    Clients can utilize the annual gift tax exclusion to its fullest by strategically gifting to family members or others each year. This reduces the size of their estate over time, potentially lessening the estate tax burden when they pass away. By giving the maximum nontaxable amount annually, they can transfer a significant portion of their wealth across years without incurring gift taxes.

    It's a simple yet effective way to steadily pass on one's legacy. If you're looking to start making strategic gifts, now could be the time to consult with an estate planning expert.

    Manage Assets with Family Limited Partnerships

    Creating family limited partnerships is a strategic tool for clients who want to manage shared family assets while also taking advantage of annual gift tax exclusions. This structure allows clients to pool their resources with family members, retaining control over the assets while distributing shares that can be valued at a discount for gift tax purposes.

    It's an effective means to transfer wealth to the next generations, protect assets from creditors, and keep the business in the family. To take the first step in creating a family limited partnership, consider reaching out to a specialized attorney or financial advisor.