Strategic Gifting: A Smart Approach to Estate Tax Planning
With the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, many high-net-worth individuals are increasingly concerned about the potential reduction of the historically high lifetime gift exemption, currently at $13.61 million per person. As this deadline approaches, it’s important to stay focused on long-term estate planning goals rather than making rushed decisions based on speculation.
Aligning Estate Planning with Your Financial Goals
Rather than reacting to the TCJA sunset with urgency, individuals should take a thoughtful approach by considering key questions: What do you want your wealth to achieve? How much can you afford to gift while maintaining financial security? Addressing these questions can help mitigate the pressure of impending tax changes and ensure that gifting strategies align with overall estate planning objectives.
Tax-Efficient Gifting Strategies
Several gifting techniques can offer both wealth transfer and income tax benefits while being relatively simple to implement:
- Pay Education and Health Care Expenses Directly: Tuition and medical expenses paid directly to an institution or provider are not subject to gift taxes, making them an effective way to support loved ones while minimizing estate tax liabilities.
- Utilize Annual Exclusion Gifts: In 2024, individuals can gift up to $18,000 per recipient without impacting their lifetime exemption. These gifts not only reduce taxable estates but also remove future appreciation and income associated with the gifted assets.
- Leverage 529 Savings Accounts: Clients concerned about overfunding 529 plans should note that under the SECURE 2.0 Act, funds can now be converted into Roth IRAs without taxes or penalties, offering additional flexibility. Accelerated gifting allows for contributions up to five times the annual exclusion limit in a single year—up to $90,000 per beneficiary ($180,000 for married couples)
Enhancing Tax Efficiency Through Charitable Giving
For those prioritizing philanthropy, tax-aware giving strategies can maximize both charitable impact and tax efficiency:
- Contribute to Donor-Advised Funds (DAFs): These funds provide a flexible and tax-efficient way to manage charitable giving. By “bunching” multiple years’ worth of donations into a DAF in a high-income year, individuals can maximize deductions while maintaining control over future charitable distributions.
- Utilize Charitable Remainder Trusts (CRTs): CRTs can be a beneficial tool for gifting appreciated assets while spreading out capital gains tax liabilities. This strategy allows individuals to receive income over time while ultimately benefiting a chosen charity.
Considering Retirement Assets in Estate Planning
Retirement accounts often constitute a significant portion of an individual’s wealth and should not be overlooked in estate planning. The SECURE Act of 2019 introduced key changes affecting inherited IRAs:
- Elimination of the “Stretch IRA” for Many Beneficiaries: Most non-spouse beneficiaries must now withdraw inherited IRA funds within 10 years of the account owner’s passing, limiting the benefits of tax-deferred growth.
- Required Minimum Distributions (RMDs): Many beneficiaries will need to take annual distributions, which could have tax implications depending on the size of the inherited account and their financial situation.
Given these changes, individuals may find it more tax-efficient to designate charitable organizations as beneficiaries of retirement accounts while leaving other assets to heirs.
Staying Flexible Amid Uncertain Tax Policy
With upcoming elections and potential tax law changes, it’s essential to avoid making hasty financial decisions based on fear or speculation. While tax rates may increase in the short term, future legislative changes remain uncertain. Maintaining a flexible estate plan that can adapt to new tax policies is crucial.
By implementing strategic gifting and tax-aware estate planning techniques, individuals can optimize wealth transfer, minimize tax burdens, and achieve their long-term financial objectives. Consulting with a financial advisor or tax professional can ensure that estate strategies remain aligned with both current regulations and personal financial goals.