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Estate planning is a crucial aspect of financial management, especially for individuals with substantial assets. With the ever-changing landscape of tax laws, one effective strategy for preserving wealth and minimizing the burden of federal estate taxes is lifetime giving. This approach not only allows individuals to transfer wealth to their loved ones during their lifetime but also offers significant tax benefits. As we approach the sunset of the Tax Cuts and Jobs Act in 2025, understanding and implementing lifetime gifting is especially important.

The Importance of Lifetime Giving in Estate Planning

One of the key goals in estate planning is to reduce the impact of federal estate taxes on your wealth. As of 2024, the federal estate tax exemption is $13.61 million per person. Only individuals with estates exceeding this amount are subject to federal estate taxes. For married couples, the exemption doubles, providing substantial leeway for transferring wealth without tax implications. However, with the scheduled reduction of the exemption to approximately $7 million per person in 2026, more Americans may face estate taxes unless they take proactive steps.

Lifetime giving is a strategy that can help mitigate the impact of these taxes. By making gifts during your lifetime, you can reduce the size of your taxable estate, thereby decreasing the potential tax burden on your heirs. Additionally, gifting allows you to take advantage of the current high exemption levels before they potentially decrease.

Understanding the Mechanics of Lifetime Giving

Lifetime giving can be executed in various forms, from small annual gifts to significant wealth transfers. One of the simplest methods is to utilize the annual exclusion, which allows you to gift up to $18,000 per recipient per year without affecting your lifetime exemption. This strategy can be particularly beneficial for those who wish to transfer smaller amounts to multiple recipients, such as children or grandchildren, over time.

However, you may need to dip into your lifetime exemption for larger transfers. While this reduces the amount you can shield from estate taxes at your death, it can be beneficial in certain circumstances. For instance, by gifting assets when their fair market value is lower, you can lock in that value for estate tax purposes, potentially avoiding taxes on future appreciation.

Steps to Implementing a Lifetime Giving Strategy

Implementing a lifetime gifting strategy involves several essential steps, each requiring careful consideration and professional guidance.

  1. Revise Your Essential Estate Documents: Before making any gifts, reviewing and updating your core estate planning documents is essential. This includes your will, revocable living trust, healthcare power of attorney, living will, and financial power of attorney. These documents lay the groundwork for more advanced planning strategies, ensuring your wishes are clearly articulated and legally enforceable.
  2. Establish and Implement Specialized Trust: In many cases, it may be more tax-efficient to gift assets through a trust rather than outright. Trusts offer a range of benefits, including protection from estate taxes, creditors, and potential family disputes. Based on your circumstances, your legal advisor can help you determine the most appropriate type of trust, such as a Grantor Retained Annuity Trust (GRAT) or an Irrevocable Life Insurance Trust (ILIT).
  3. Prepare Assets for Gifting: Once you’ve decided which assets to gift, you’ll need to prepare them for transfer. This may involve retitling property, obtaining appraisals, or making other adjustments to ensure the assets are ready to be placed in trust.
  4. Transfer Assets into Trusts: With the preparatory work complete, you can transfer the assets into the chosen trusts.
  5. Obtain Valuations for Accurate Reporting: The IRS requires that all significant gifts be reported with adequate disclosure, which typically involves obtaining a professional valuation of the gifted assets. Accurate valuations are crucial, as they determine how much of your lifetime exemption is used.
  6. Complete and Submit the Gift Tax Return (Form 709): Finally, all gifts exceeding the annual exclusion must be reported to the IRS using Form 709, the Gift Tax Return. This form must be filed by April 15th of the year following the gift, and it is recommended to work with a qualified CPA to ensure the return is accurate and timely.

Final Thoughts

While lifetime giving can be complex and requires careful planning, the potential benefits are substantial. Transferring assets during your lifetime can reduce your taxable estate, minimize the impact of future tax law changes, and ensure that your wealth is passed on according to your wishes. As with any significant financial decision, working with a team of trusted advisors, including financial planners, attorneys, and CPAs, is essential to navigate the complexities and maximize the benefits of lifetime giving. Ready to get started? Reach out to our team today.