Individuals who have achieved financial stability via smart investments and/or professional success have to think carefully about what they intend to leave for the people they love when they’re gone. It is common for those with significant personal resources to want to leave assets for their children and grandchildren as their legacy.
Unfortunately, sizable estates can trigger estate taxes at both the federal and state levels, which is why people often make strategic gifts for many years to diminish what they hold in their own names. With that said, periodic gifts could potentially affect taxes as well.
Gift taxes dictate what people can receive each year without penalty
If the goal is to eliminate or at least minimize the taxes paid on someone’s estate, then avoiding taxes when making gifts while someone is still alive is likely also a goal. The testator distributing their resources to their loved ones will want to make sure the total value of their gifts each year does not exceed the maximum limit.
As of 2023, each recipient could accept up to $17,000 in gifts before they become responsible for any gift tax. The more beneficiaries who are receiving gifts and the more years a testator shares their resources with loved ones before their death, the more those gifts can help reduce the value of the estate all while avoiding gift taxes.
Strategic gifts can influence estate tax liability
When someone dies and there is a review of their finances to determine what estate tax obligations they may have, the gifts that someone made prior to dying will actually contribute to the total taxable value of their state. Typically, any gifts made in the three years prior to someone’s death will add to the total value of their estate and could therefore push the estate over the threshold for estate taxes in some cases.
For many older adults who have sizable personal holdings, gifts alone will not be sufficient to eliminate the possibility of estate taxes. Creating a comprehensive estate plan with estate taxes in mind can help individuals who are working with an experienced legal professional to maximize what they wish to pass to the people and causes that matter the most to them.