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How does gifting during your lifetime impact estate taxes?

On Behalf of | Jan 24, 2025 | Estate Planning

Gifting assets during your lifetime is a strategy that can reduce the size of your estate, potentially minimizing estate taxes when you pass away. This approach allows you to share your wealth with loved ones while taking advantage of tax laws that permit certain exclusions and exemptions for gifts.

Understanding the annual gift tax exclusion

The annual gift tax exclusion is one of the most effective tools for reducing your taxable estate. Under federal law, you can give up to a set amount each year to as many individuals as you choose without triggering a gift tax. For example, in 2024, this amount is $17,000 per recipient. Gifts within this limit do not count against your lifetime estate and gift tax exemption.

Lifetime estate and gift tax exemption

The federal government provides a combined lifetime estate and gift tax exemption. As of 2024, this amount is $12.92 million for individuals and $25.84 million for married couples. Any gifts exceeding the annual exclusion reduce your lifetime exemption. For instance, if you give $117,000 to one person in a year, $100,000 of that gift will count against your lifetime exemption.

Tax benefits of gifting

Gifting assets during your lifetime can reduce the size of your taxable estate, potentially lowering the estate taxes your heirs may face. It also allows you to transfer assets that might appreciate over time. By gifting these assets now, any future growth occurs outside of your estate, which can further reduce tax burdens. However, it is important to consider whether the gift may result in capital gains taxes for the recipient when they sell the asset.

Other considerations for gifting

Certain gifts, such as payments for medical expenses or tuition made directly to the provider, are excluded from both the annual gift tax exclusion and your lifetime exemption. This can be an additional way to support loved ones without impacting your tax situation. 

Proper planning and an understanding of tax laws can make gifting a valuable part of your estate strategy. Careful consideration can help you support your loved ones while minimizing tax implications for your estate.