When the end of the year is approaching, many people participate in year-end gifting, generally when individuals give out important assets to their family members around the holiday season. As you plan to give some of your assets to your family and loved ones, you should remember that the government may need to know about this and could even decide to collect taxes. The good news is that most of your estate and gifts are excluded from taxation and minimize your estate’s probate costs.
What Are Gift And Estate Tax?
Gift and estate tax are when the federal government decides that you must pay a specific amount of taxes if your estate or gift was more than the current year’s exemption amount. According to the IRS, estate and gift taxes apply to property, money transfers, and other important assets. However, taxes usually “only apply to large gifts made by a person while they are alive, or large amounts left for heirs when they die.”
Florida does not have a gift tax. Some states do have a gift tax, so it’s important to work with an experienced local Estate Planning Attorney.
How To Avoid Paying Estate Tax
There are a few different ways to use year-end gifting to avoid paying estate taxes or reducing the amount you will owe after your death. Here are a few of the most common strategies used:
- Use the annual gift tax exclusion
- Use the lifetime gift and estate tax exemption
- Make payments directly to colleges, universities, hospitals or other medical institutions on behalf of someone else
How Does The Annual Gift Tax Exclusion Work?
Right now, the amount of money you can give people before being taxed is $16,000 yearly. If you have a spouse and are both gifting, you can give $32,000. The individuals who receive these gifts from you will usually not owe any taxes and will not need to report them to the IRS unless they are from a foreign source.
You must remember that you must fill out a gift tax return if you give more than $16,000 in one calendar year. If you and your spouse are splitting gifts for the year, you must fill out the gift tax return regardless of whether you went over $32,000 or not.
How Does The Lifetime Gift And Estate Tax Exemption Work?
After the Tax Cuts and Jobs Act passed at the end of 2017, the estate and gift tax exemption has continued to increase. Below are 3 important facts you need to know regarding gift and estate tax exemptions.
- The highest tax rate is currently at 40%.
This means that the most you may need to pay for estate or gifts that exceed the exemption amount has been set at 40%.
- The estate and gift tax exemption is currently at $12.06 million for individuals and $24.12 million for couples.
This amount has increased from $11.7 to $23.4 million in 2021 and is set to expire in 2025. If you keep your estate under this amount, you will not owe any taxes.
- You can contribute tax free to a 529 college savings plan.
A special tax rule allows you to make a lump-sum contribution in a single year and treat it as though it was made over 5 years for gift tax purposes.
Regarding the gift and estate tax exemption of $12.06 million, it’s important to remember that this is not permanent. Congress will need to decide the tax exemption rate when 2025 arrives or if the tax exemption amount will go back to $5.49 million, which was set in 2017.
Annual or lifetime gifts should be completed before midnight December 31 to qualify for that year’s tax exemption.
Benefits of Lifetime and Annual Gifting
Lifetime gifting isn’t only for the wealthy. The Siegel Law Group can help you to gift your assets to those who mean the most to you as soon as possible. For many families, annual year-end gifting is better than leaving your assets to your loved ones after your death:
- Give Happiness
Your heirs can have access to the gifted assets immediately instead of waiting until after you die. This could allow your heirs to pay for education, start a new business, enjoy travel or pay debts.
- Participate in Happiness
You will have the opportunity to see your family and loved ones make use of your gifts.
- Reduce Probate Costs and Taxes
The most important reason to consider gifting your assets as soon as possible is that their value can increase after they are given to loved ones, which will assist in reducing your taxable estate and probate costs.
- Protect Privacy
If you gift your assets today, that gift will not be public, versus bequeaths made in your will after your death are typically public information.
High Net Worth Individuals
For high net-worth individuals, if you participate in year-end gifting and give your child $10 million today, that money will most likely increase throughout the years. Therefore, if your beneficiary holds onto that money for a decade or more, it will be worth much more. However, if you decide to bequeath your assets after you pass away, the money will be taxed, and the tax exemption could increase to $5.49 million again if the government does not make $12.06 million permanent.
For those who can participate in gifting while keeping enough money to enjoy their life and protect their loved ones today, lifetime gifting may be a preferred method.
Contact THE South Florida Estate Planning Attorney – Barry Siegel – Today
If you are thinking about giving some of your assets to your children or loved ones and would like to learn more about avoiding estate taxes and probate costs, please do not hesitate to reach out to our South Florida Estate Planning Lawyers today. We understand the laws surrounding estate planning and gifting, and we would be glad to assist you. Call our office at 561-576-6206 to schedule a complimentary consultation or fill out our contact form, and a staff member will reach out to you as quickly as possible.