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Estate Planning and Gifting Strategies Before Year-End

As the end of the year approaches, it's an important time for individuals and families to review their estate planning and consider potential gifting strategies. While the laws and regulations around estate planning and taxes can be complex, taking proactive steps now can help ensure your assets are distributed according to your wishes and potentially minimize your tax liability.

 

Estate Planning Basics

Estate planning involves making arrangements for the management and transfer of your assets during your lifetime and after your death. Key components of an estate plan typically include:

  • Will or living trust - Specifies how your assets should be distributed
  • Powers of attorney - Designates who can make financial and medical decisions on your behalf if you become incapacitated
  • Advance healthcare directive - Outlines your preferences for end-of-life care

Gifting Strategies

Gifting is an important part of many estate plans. By gifting assets during your lifetime, you can reduce the size of your taxable estate and provide for your loved ones. Some common gifting strategies to consider include:

  • Annual Gift Tax Exclusion: Each year, you can gift up to $17,000 (in 2023) per recipient without incurring any gift tax. Married couples can gift up to $34,000 per recipient.
  • Lifetime Gift Tax Exemption: In addition to the annual exclusion, you have a lifetime gift tax exemption of $12.92 million (in 2023). Gifts that exceed this amount may be subject to gift tax.
  • Charitable Gifts: Donating assets to qualified charitable organizations can provide tax benefits while supporting causes you care about. Charitable gifts may also reduce the size of your taxable estate.
  • 529 College Savings Plans: Contributions to 529 plans allow you to gift money for a loved one's education while potentially receiving state tax deductions and sheltering the assets from your taxable estate.

Examples

Here are some examples of estate planning and gifting strategies that individuals may want to consider before the end of the year:

  1. Annual Gift Tax Exclusion: In 2023, individuals could gift up to $17,000 per recipient ($34,000 for married couples) without using any of their lifetime gift/estate tax exemption. These annual exclusion gifts can help reduce the size of one's taxable estate.
  2. Lifetime Gift Tax Exemption: In 2023, the lifetime gift/estate tax exemption was $12.92 million per individual ($25.84 million for married couples). Making gifts that utilize this exemption helped reduce future estate taxes.
  3. Charitable Contributions: Donating to qualified charitable organizations can provide income tax deductions in the current year, as well as potentially reduce the size of one's taxable estate. Contributions can be made directly or through vehicles like donor-advised funds.

 

Common pitfalls to be aware of when it comes to estate planning and gifting strategies before the end of the year include:

  1. Underestimating estate/gift tax exemptions: The federal estate and gift tax exemption is currently $12.92 million per individual in 2023. However, this exemption amount is scheduled to be cut in half starting in 2026. Failing to take advantage of the higher exemption limit before the reduction can lead to higher taxes.
  2. Improper titling of assets: Ensuring assets are properly titled and beneficiary designations are up-to-date is crucial for effective estate planning. Mistakes here can undermine your intended wealth transfer.
  3. Overlooking state-level estate/inheritance taxes: Many states have their own estate or inheritance taxes, which may have lower exemption limits than the federal level. Planning only for federal taxes can leave state-level liabilities unaddressed.
  4. Gifting without considering future needs: Making large gifts before year-end can reduce your estate, but you need to ensure you maintain enough assets to cover your own future expenses and long-term care needs.
  5. Lack of coordination between estate plan and other financial plans: Estate plans should be integrated with your overall financial, investment, and retirement plans to ensure cohesive wealth management.

 

Federal Estate and Gift Tax Considerations:

  1. Federal Estate Tax Exemption: In 2023, the federal estate tax exemption is $12.92 million per individual ($25.84 million for married couples). This exemption amount is scheduled to decrease to around $6 million per person in 2026 unless Congress acts to extend the current higher exemption. Individuals with estates over the exemption amount should consider making taxable gifts before the exemption decreases.
  2. Annual Gift Tax Exclusion: In 2023, the annual gift tax exclusion is $17,000 per recipient ($34,000 for married couples). Making annual exclusion gifts can help reduce the size of one's taxable estate.
  3. Lifetime Gift Tax Exemption: The lifetime gift tax exemption is currently unified with the federal estate tax exemption of $12.92 million. Gifts made during life that exceed the annual exclusion amount count against this lifetime exemption.

State Estate and Inheritance Tax Considerations:

  1. State Estate Taxes: Approximately 18 states and the District of Columbia impose state-level estate taxes. The exemption amounts and tax rates vary by state. Individuals should review the estate tax laws in the state(s) where they reside or own property.
  2. State Inheritance Taxes: Six states impose inheritance taxes, which are taxes on the recipients of an inheritance rather than on the estate itself. The rates and exemption amounts vary by state and the relationship of the heir to the deceased.
  3. Portability of Exemptions: When planning, individuals should also consider the portability of federal and state exemptions between spouses.

Other Considerations:

  1. Valuation Discounts: Certain gifting strategies, such as family limited partnerships or limited liability companies, may allow for valuation discounts that can maximize the use of one's lifetime exemption.
  2. Charitable Giving: Making charitable gifts, either outright or through vehicles like charitable trusts, can provide both estate and income tax benefits.
  3. Timing of Gifts: Carefully timing the transfer of assets can be important, as the value of the gift for tax purposes is determined on the date of the gift.

 

Here are some actionable steps and deadlines to consider for estate planning and gifting strategies before the end of the year:

  1. Review your estate plan: Make sure your will, trust, power of attorney, and other key documents are up-to-date. This should be done annually, but the end of the year is a good time to review.
  2. Consider annual gift tax exclusions: In 2023, you can gift up to $17,000 per person ($34,000 for married couples) without reducing your lifetime gift tax exemption. The deadline to make these gifts is December 31st.
  3. Utilize your lifetime gift tax exemption: In 2023, the lifetime gift tax exemption is $12.92 million per individual ($25.84 million for married couples). Making taxable gifts this year reduces your future estate tax liability. The deadline is also December 31st.
  4. Contribute to 529 college savings plans: You can gift up to $80,000 per beneficiary ($160,000 for married couples) in a single year without reducing your lifetime exemption, as long as you elect to treat the gift as being made over 5 years. The deadline is December 31st.
  5. Review charitable giving strategies: Consider bunching charitable donations, qualified charitable distributions from your IRA, or setting up a donor-advised fund before the end of the year to maximize deductions.

By taking the time to review your estate plan and gifting options now, you can provide greater financial security and peace of mind for yourself and your loved ones. Planning ahead is crucial, so don't wait - get started on your year-end estate planning today.

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