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How gift taxes can influence someone’s estate plan

On Behalf of | May 26, 2023 | Estate Planning |

Individuals who have significant personal property in Virginia need to address concerns including creditor claims and taxes when thinking about their legacy. A proper estate plan can help protect assets from liquidation during probate administration and even from creditor claims before someone dies. The process of reducing tax obligations and estate tax risk often involves changing the ownership of specific assets.

For example, some people will transfer assets into a trust to minimize tax risk after they die. Others will provide annual gifts to their closest family members while they are still alive. The benefits of employing a structured gift strategy are numerous. The testator gets to watch people enjoy their inheritance, which can be very rewarding. Their family members can enjoy an increase in their standard of living based on the gifts and resources they receive each year. The estate and its beneficiaries can also benefit from the reduction of future estate tax liabilities. However, there are also taxes that can apply to gifts.

There is an annual allowance to exempt gifts

If people could simply give their valuable property to others without triggering taxes, people would very likely abuse that system. Therefore, the federal government limits how much one person can transfer to another individual each year without triggering gift taxes. In 2023, each recipient qualifies for an annual exclusion amount of up to $17,000. People can gift up to $17,000 worth of cash and personal property before there will be any tax concerns. Testators can plan to complete a specific number of gifts over a specific number of years to reduce the total value of their estate while minimizing tax responsibilities.

Recent gifts can impact estate tax calculations

It is important to note that generally the last three years of gifts made before someone dies can count toward the total value of their estate for the purposes of calculating estate tax obligations. Testators who are aware of these rules will have an easier time diminishing their tax obligations through structured gifting.

Planning annual gifts to loved ones can be part of a broader tax strategy that helps someone maximize what they pass to loved ones when they die.