Like in previous election cycles, 2024 has been rife with pledges and warnings from both political parties. While taxation remains a prevalent subject, it has become particularly alarming recently due to discussions surrounding modifications to capital gains and estate taxes.
No matter who secures the presidency in November, formulating a tax plan is crucial for structuring your estate for your heirs. One approach worth considering is to gift portions of your estate prior to your passing to take advantage of specific tax advantages. Continue reading to discover how this process works and whether transferring assets early is a sound strategy.
Current tax regulations applicable to your estate
The only certainties in life are death and taxes—or so the saying goes. Taxes are incurred when you earn, spend, and transfer money to your loved ones after your demise, assuming your estate’s value is significant enough to incur taxation.
At present, the IRS provides two provisions aimed at reducing the estate taxes owed by your heirs posthumously: the gift tax exclusion and the estate tax exclusion. Collectively, these comprise the unified tax credit. Here’s how they function:
Gift tax exclusion
As of 2024, individuals may gift up to $18,000 to any other person annually without the need to report it to the IRS or affecting the gifter’s lifetime estate exemption. This allows you to give up to $18,000 in cash or similar gifts to as many individuals as you wish each year. Your spouse can similarly gift up to their individual limit.
Estate tax exemption
In 2024, you hold a basic estate tax exclusion amounting to $13,610,000. This provision ensures that your heirs will not owe any estate taxes—which currently capped at 40%—on assets transferred after your passing, provided the total remains below this threshold. This applies to all assets passed on to your beneficiaries, including real estate, investment portfolios, savings accounts, retirement funds, collectibles, and more.
Concerns surrounding existing estate tax regulations
The primary concern regarding current estate tax provisions is their prospective alteration by the end of 2025, with further reductions possible in subsequent years.
In 2017, the Tax Cuts and Jobs Act (TCJA) was enacted by President Trump, introducing multiple amendments to estate and gift tax exclusion thresholds, notably doubling the basic exclusion amount for tax years spanning 2018 to 2025.
As a result, the federal lifetime gift tax exemption for each person surged from $5.49 million in 2017 to $11.18 million in 2018 (and now stands at $13.61 million in 2024). This is independent of any gifts you make during your lifetime, capped at $18,000 annually per person.
While this figure may appear substantial, data from the Census Bureau indicates that fewer than 1% of beneficiaries owed any estate tax in 2022. Nevertheless, these temporarily elevated thresholds are set to expire next year. If you were to pass on or after January 1, 2026, your estate tax exemption would likely be reduced by approximately 50% under current regulations. Adjusted for inflation, the exemption is projected to hover around $7 million for the years following 2026.
This scenario bears political implications, particularly in an election year. Should Donald Trump secure a second term, it stands to reason that he could extend the TCJA exemption thresholds into 2026 and beyond.
Conversely, if Kamala Harris emerges victorious, it is improbable that significant increases in these limits would occur while she is in office. Previously, she has been a vocal critic of the TCJA and has advocated for policies intended to reverse many of its effects. Furthermore, she has proposed the elimination of the step-up basis and the taxation of unrealized gains, which could lead to greater tax burdens for your beneficiaries—and potentially force them to sell off your assets to meet tax obligations—when you pass.
Gifting parts of your estate early
If your estate holds considerable value, you might be concerned that forthcoming tax shifts could diminish your beneficiaries’ inheritances. Although the specific nature of future tax adjustments is uncertain, irrespective of the election results, one viable option involves distributing some of your assets while you are still living.
This might encompass:
- Providing cash gifts
- Transferring property
- Assigning business stakes or securities
Provided your annual gifts stay within the limits of the gift tax exclusion, both you and your recipients can transfer assets prior to your death without incurring tax ramifications.
For instance, if you have 15 grandchildren and aim to assist with their educational expenses, you could write 15 checks totaling $18,000 each this holiday season without needing to report this to the IRS, resulting in $270,000 in tax-exempt gifts.
If you’re married, your spouse could double your efforts. Together, you’d be positioned to gift $540,000 to your 15 grandchildren without impacting your lifetime estate exemption or necessitating gift tax payments. You could then continue this practice in the following years, systematically reducing your estate.
Regardless of how you decide to allocate your estate, there are several considerations you’ll want to reflect on:
Does this concern me?
Planning regarding estate taxes is a pertinent issue for individuals with significant net worth, but should it also concern the average American adult?
While it’s factual that most estates will bequeath their assets to heirs without incurring taxes, predicting future legislative alterations is challenging. For instance, the abolishment of the step-up basis could pose an issue for numerous Americans.
Currently, inherited properties are transferred to heirs at their present (stepped-up) market value. As such, if your parents originally acquired their home for $200,000 in 1980 but pass it to you at a valuation of $1.3 million, taxes would only apply to the amount exceeding $1.3 million upon sale. In the absence of the step-up basis, however, you could owe taxes on $1.1 million or more of that property’s value.
Even if your estate isn’t worth millions, gifting some of your assets could still be a prudent strategy as tax regulations adapt in the years ahead.
What is the value of your estate?
The current estate tax exemption limits will sunset in 2025, thus making it vital to assess not only your estate’s anticipated value but also the potential shifts in tax law. If you possess a business, a valuable stock portfolio, or anticipate significant appreciation in your real estate assets, you may find yourself increasingly concerned about estate taxes, even if you don’t consider yourself “ultra-wealthy.”
It’s also important to bear in mind that back in 2008, the total estate exemption limit was merely $2 million. Once you factor in home valuations, retirement holdings, and other savings, middle-class families could still face repercussions if the exemption cap ever reverts to such levels.
What resources remain for your living expenses?
Distributing your assets can be a savvy tactic—as long as you ensure it won’t leave you in a financially precarious position. Confirm that you have ample liquid funds and income-producing assets to sustain your retirement costs. Don’t overlook unforeseen expenses like long-term healthcare. If you decide to gift income-generating properties, factor in that lost income when constructing your annual budget.
What assets are in your possession?
Transferring all asset types before your passing may not be advisable. For instance, gifting low-basis assets prematurely could negate numerous tax advantages that your beneficiaries might otherwise enjoy. If you purchased your home long ago at a considerably lower price than its current worth, your heirs would benefit from a stepped-up basis at your passing. Gifting them your residence ahead of time would erase that advantage and could burden those you leave behind with taxes on all the capital gains.
Transferring voting shares may also relinquish control which you might wish to maintain while alive. Furthermore, gifting cash now only makes sense if you can still sustain your quality of life.
Can your heirs effectively manage your assets?
For many individuals, the only thing worse than the IRS claiming part of their estate is witnessing loved ones squander it. In certain cases, you may doubt the ability of your children, grandchildren, or other beneficiaries to manage assets or cash responsibly just yet.
If such is the case, consider establishing a trust to initiate the gifting of assets while controlling access to them.
As per Asher Rubinstein, an asset protection attorney and partner at Gallet, Dreyer & Berkey in New York, this is a widely utilized and tax-efficient method. “Many clients establish family limited partnerships (FLPs) and contribute assets (such as real estate, securities, and business interests) to the FLP,” he notes. “While they are still alive, clients gift interest in the (LP) to their children, effectively reducing their own estate tax exposure, while retaining the General Partner interests.”
“The parents maintain control over everything, even if they have transferred most or all of their LP interests,” he adds.
Is gifting my estate in advance a wise decision?
Determining whether early asset distribution is appropriate hinges on your financial condition and available resources. If you’re anxious about leaving your loved ones with substantial estate tax burdens—either due to your present net worth or anticipated tax alterations—gifting cash, securities, and other assets now can significantly lower your estate’s overall value.
Thanks to the annual gift tax and lifetime estate tax exclusions, you can judiciously diminish your assets and alleviate the tax pressure on your beneficiaries long before your time comes.
