There’s no escaping taxes. Whether you’re transferring wealth to loved ones, or giving away generous gifts, estate and gift tax laws exist to prevent tax escapism.
But, as of 2024, there may be a small window of opportunity… Tax exemptions are at record high levels, meaning high net-worth individuals can now transfer wealth with minimal tax impact.
In 2017 transfers above $5.49 million per individual were subject to federal estate and gift tax. Just five years later, in 2024, this threshold has more than doubled – currently set at $13.61 million in asset value per individual. This is both for lifetime gifts and estate tax. Asset transfers exceeding this amount are currently set to tax at a 40% tax rate.
But these favorable conditions, ushered in by the provisions of the 2017 Tax Cuts and Jobs Act, are set to expire at the end of 2025. And, with US legislative changes more prevalent than ever, the higher threshold could decrease sooner than expected. That’s why proactive tax planning has never been more critical.
In this blog, our CPAs advise on safe ways to make hay while the sun shines and take advantage of the high exemptions.
Strategic Use of Trusts
Trusts provide structured ways to transfer wealth for tax efficiency.
- Irrevocable Trusts: Transferring assets into an irrevocable trust means they no longer belong to your estate. As such, your taxable value will be lower. These trusts are typically used to protect assets from creditors but require careful consideration and planning because they cannot be changed or revoked.
- Grantor Retained Annuity Trusts (GRATs): With this type of trust, you can transfer appreciating assets and still receive fixed annuity payments, based on the initial value of the assets you placed into the GRAT. It is however only for a set period of your choice. Thereafter, any remaining asset appreciation passes to the beneficiaries tax-free.
- Dynasty Trusts: Assets within a dynasty trust can continue to appreciate while being shielded from estate taxes. Once transferred, they are owned by the trust, which means they aren’t taxable as part of your estate. This structure is designed for long-term generational wealth protection. Beneficiaries can access distributions and benefits while keeping the core assets within the trust. However, if assets inside the trust are sold, any appreciation may be subject to capital gains tax. Therefore, it is best considered to preserve generational wealth long-term.
Charitable Giving
Giving to charity can be both tax efficient and make a lasting philanthropic impact.
- Charitable Remainder Trusts (CRTs): Allow you to donate assets to a trust, which sells them tax-free and reinvests the proceeds. You can receive an income stream from the trust for a set period (up to 20 years). Once the trust term ends, the remaining assets are donated to the designated charity. This helps you reduce your taxable estate while supporting a cause you care about.
- Donor-Advised Funds (DAFs): This option allows you to contribute assets and receive an immediate tax deduction while giving you the flexibility to recommend how and when donations are distributed to charities over time. Although you no longer own the assets, a DAF lets you actively participate in directing charitable giving.
Lifetime Gifting
Why wait until the future to pass on your wealth when you can do it tax-free today?
- Annual Exclusion Gifts: The annual gift exclusion for 2024 is $18,000 per recipient. This means you can give up to this amount to as many people as you like each year without using your lifetime exemption or triggering gift tax. If you’re married, you and your spouse can combine your exclusions, allowing you to give up to $36,000 per recipient annually – all tax-free.
- Gifting Assets Above the Annual Limit: If you want to transfer larger sums, you can use your lifetime exemption of $13.61 million to gift assets beyond the annual exclusion without incurring gift tax. This is particularly useful for transferring appreciated assets like stocks or real estate. Beware of capital gains tax, though. If you gift an appreciated asset, the recipient takes on your original cost basis. This means that they will owe capital gains tax on the total appreciation when they sell it in the future.
Direct Payments for Education, Medical Expenses and Life Insurance
Some of the most overlooked ways to reduce estate value tax-free are making direct payments for education, medical expenses, and life insurance. These are not considered taxable gifts, meaning they do not count toward the annual exclusion or lifetime exemption. But, they still reduce your taxable estate, provided they meet IRS requirements.
- Education: Tuition costs paid directly to an educational institution for a family member are valid. This applies to private schools, colleges, and universities, but for tuition only.
- Medical Expenses: You can cover medical bills (including surgeries, prescriptions, insurance premiums, and long-term care) by making payments directly to healthcare providers.
- Life Insurance: A properly structured life insurance policy can provide heirs with liquidity to cover estate taxes, settle outstanding debts, or maintain financial stability without forcing the sale of inherited assets. If you place the policy in an Irrevocable Life Insurance Trust (ILIT), it stays outside of your taxable estate, ensuring that beneficiaries receive the full benefit tax-free.
Partner With a Tax Expert
While exemptions may be at historic highs, the tax landscape is volatile with many potential changes on the cards. Maximizing these benefits requires careful monitoring of tax law updates.
At Fusion CPA, we can help you navigate these complexities by:
- Structuring wealth transfers, trusts, and gifting strategies to suit your philanthropic and financial needs
- Keeping you informed on legislative changes.
- Ensuring your estate plan aligns with long-term financial goals for maximum tax advantages. Contact us for help today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog. The same applies to the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.