Beyond The Will

Is 2024 the Year of Gifting? Different Ways to Gift to Minimize Estate Taxes

January 16, 2024

   

Why Gifting and Why 2024?

Gifting assets during life allows individuals to minimize their estate tax liabilities at death. Gifting is a strategy that can preserve wealth for future generations by minimizing estate taxes.

Each year, the IRS allows taxpayers to gift a certain amount to any one person without any tax implications. Known as the Annual Gift Tax Exclusion, the amount for 2024 is $18,000 per individual or $36,000 per married couple. This year marks the highest annual gift tax exclusion amount yet.

Individuals making gifts over $18,000 will need to use their Lifetime Gift Tax Exemption amount for any portion of the gift over $18,000. The Lifetime Gift Tax Exemption is the amount individuals are allowed to gift over their entire lifetime without any tax implications. Like the Annual Gift Tax Exclusion, the Lifetime Gift Tax Exemption is adjusted yearly and has increased to $13,610,000 for 2024.

While 2024 marks the highest amounts for both the Annual Gift Exclusion and Lifetime Gift Tax Exemption, these amounts will not be available to taxpayers for long. At the start of 2026, the Lifetime Exemption amount is projected to drop to $5,000,000, adjusted for inflation. The exemption amount will be reduced significantly in 2026, leaving taxpayers with the next two years to take advantage of current tax-free gifts.

Given the upcoming changes, individuals should highly consider gifting certain assets now rather than later. There are many ways to gift, each with pros and cons.

#1: Gifting Outright

The simplest way to gift is to gift assets outright to family members or charities. Gifting outright is the most immediate way to give away assets during life, but there are several pros and cons to consider.

Pros of Gifting Outright

  • Assets grow over time. Giving away assets to family members now allows the asset to grow over time without any gift or estate taxes. Otherwise, the asset would be included in the estate and could result in the estate having to pay taxes. This would likely reduce the amount of wealth passing to family members. Gifting outright could allow more wealth to pass on.
  • Passing on experience and wisdom. If gifting away assets of a family business outright to children or other family members, the gift can often serve as a moment to educate the younger generation on the ins and outs of the family business.

Cons of Gifting Outright

  • Loss of control. Gifting assets sometimes may also include losing access to the gifted asset. For individuals gifting assets like membership in a family business, the gift may come with letting go of some control associated with the membership.
  • Gifting to young recipients. Gifts to minor family members may provide tax benefits but are usually unavailable until the minor reaches 18 or 21. In Massachusetts, gifts to minors must be made to a custodial account known as a Uniform Transfers to Minors Act (“UTMA”) account. A UTMA account is held until the minor reaches 21 years of age. This ensures that gifts are preserved until family members are responsible enough to handle their own finances.

#2: Gifting in Trust

Another common way to gift is to make gifts in trusts. Gifting in trust allows assets to be distributed according to a trust’s specific terns. This method provides a sense of security as a trust can be structured to meet an individual’s estate plan and financial goals.

Pros of Gifting in Trust

  • Ensures gifts are properly managed and used. Gifting assets to an irrevocable trust ensures that the gifted asset is not being misused. By gifting to the trust, an individual can determine how the gifted asset is invested and distributed over a designated period. For example, individuals can direct a trust to use assets for the beneficiary’s educational costs, or the trust could require the beneficiary to have access to only a portion of the assets until they reach a certain age.
  • Certain trusts can avoid taxes on gifts over the Annual Gift Tax Exclusion. Gifting assets to a certain trust, known as a Crummey Trust, allows the beneficiary to withdraw the gifted asset for a limited time (limited-time withdrawal rights). A gift to this type of trust would be eligible for the gift tax exclusion because it would be considered a present interest.

Cons of Gifting in Trust

  • Recipients may not have access to assets right away. Given that gifts in trust must comply with the distribution terms of the trust, recipients may not have immediate access to the asset. Individuals may be better off gifting outright if they expect the recipient to need access to the gifted asset in the near future.
  • Immediate access to gifts in trust may affect long-term wealth. Gifting to a trust that provides children with immediate access to the trust assets may impede the ability to generate wealth over longer periods of time. However, depending on the terms of the trust, this could be avoided by adding limitations to the use of trust assets.

While the above describes the pros and cons of both methods of gifting, there are many other factors to consider depending on your estate tax planning and financial goals. Strategic gifting involves thoughtful discussions and careful planning, and 2024 is the year to start.  Take advantage of tax-free gifting before the Lifetime Gift Tax Exemption drops in 2026. Meet with an estate planning attorney to discuss your long-term goals to minimize estate taxes and preserve wealth for future generations.

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