Giving gifts to loved ones can be a major source of joy. Many people actually enjoy giving gifts more than they enjoy receiving them. For this and a host of other reasons, many older adults who have accumulated substantial personal resources intentionally arrange to give valuable gifts to their loved ones throughout their golden years before leaving them and inheritance after they die.
There are benefits to such structured or planned gifting, not the least of which is the impact it can have on someone’s mental health and their relationship with their loved ones. However, those gifts can also have an impact on someone’s estate plan.
They can drop the estate value below the taxation threshold
Estate taxes can consume as much as 40% of the estate’s total value. If someone has a multi-million-dollar estate that will likely be subject to tax after they die, making gifts during their golden years could change that fact. The more beneficiaries they give gifts to and the more years they successfully make those transfers, the greater the likelihood that they can avoid estate taxes by diminishing their personal holdings. When combined with other strategies, like moving high-value assets into a trust, planned gifts can help protect someone’s resources from taxes.
However, there are limits to gifting if someone wants to minimize taxes. Gift taxes are a consideration. In 2023, the annual gift tax exclusion per recipient is $17,000. Anything beyond that could lead to tax liabilities. Additionally, the gifts made prior to someone’s death can still contribute to the total value of their estate. The last three years of gifts at the time of someone’s death will all contribute toward the total value of the estate and might push the value of the estate back over the estate tax threshold.
People, therefore, need to plan very carefully based on the value of their personal resources and their current age to more effectively minimize the chance of estate taxes while also avoiding gift taxes. Considering planned gifting as one of the ways to reduce taxes and leave a more meaningful legacy could benefit those worried about what will happen with their assets after they die.