When someone has significant personal property in their name, their estate planning needs will be different than those with fewer personal assets. They need to worry about taxes, outside claims against their estate and how loved ones might misuse a large inheritance.
One of the ways testators reduce their tax liabilities and retain some control over what they give to their loved ones is to pass those resources as gifts while they are still alive rather than holding everything to pass as part of an estate after they die. Strategic gifts can slowly diminish the total value of someone’s estate and can allow a testator to watch their loved ones enjoy part of their inheritance while they are still alive.
How will those gifts impact someone’s estate?
They will reduce the total value of an individual’s property
Annual gifts to loved ones will potentially significantly reduce the total taxable value of the estate. The bigger someone’s family is and the bigger the gifts that they make each year, the less likely it is that they will have to worry about estate taxes after they die. Of course, large gifts can also trigger taxes while someone is still alive, so structured giving is very important. Currently, in 2023, people can make a gift of up to $17,000 per recipient each year without triggering any gift taxes.
They can sometimes trigger tax burdens
Gifts made before someone’s death can potentially put them over the limit for the total value of their estate and trigger federal taxes. When seeking to establish the financial value of someone’s estate after they die, it is typically necessary to include the gifts made to their friends, family and other loved ones in the three years prior to their death. If there were large gifts made from an estate near the threshold, the gifts could be the reason that the estate ends up owing taxes.
Ideally, gifts can help push an estate below the estate tax threshold for the year when someone dies and can occur annually for multiple years before tapering off in someone’s later life. The value of someone’s estate, the circumstances of their loved ones and their current health can all influence the best strategic gifting plan for someone hoping to minimize estate taxes.
Exploring numerous options for controlling the transfer of property is an important aspect of the estate planning process, especially if someone has significant personal resources. Seeking legal guidance is usually a good place to start.