Our recent exploration into maximizing estate and gift tax exemptions is intricately connected to the broader theme of our last blog, "Aging in Place with Confidence: Addressing Concerns and Realities." We've been advocating for seizing opportunities before potential reductions in exemptions by the end of 2025. This urgency extends beyond financial strategies, dovetailing seamlessly with the pivotal concept of ensuring a secure and confident aging experience at home.
Consider this: in 2023, a couple with an estate valued up to $25.84 million can seamlessly pass on their wealth to heirs without grappling with federal estate or gift taxes. This financial foresight aligns seamlessly with the broader vision of empowering individuals to navigate their financial future confidently. However, come December 31, 2025, without legislative intervention, this exemption faces a substantial cut, roughly halving its value due to the sunset provision within the Tax Cuts and Jobs Act (TCJA) 2017.
For those proactively addressing financial concerns and realities, the time to act is now. Strategic financial and practical measures can position individuals for a more secure and confident financial future. It involves leveraging the lifetime estate and gift tax exclusion, which remains historically high, aligning seamlessly with the overarching goal of addressing the broader financial concerns and realities individuals may face.
Understanding Your Lifetime Exemption
The lifetime exemption, appropriately named, signifies the sum of money you can generously gift throughout your life without incurring gift or estate tax. Subject to annual inflation adjustments, the unified tax credit encompasses both gift and estate tax exemptions, with projections indicating it will exceed $13 million ($26 million for a married couple) by 2025. However, if the sunset provision takes effect, it could plummet to approximately $6.5 million ($13 million for a married couple) by the year's end.
You can gift up to 100% of your lifetime exclusion amount, a crucial aspect that integrates with broader financial planning considerations. Any amount exceeding the exclusion becomes subject to estate tax when transferred to heirs, highlighting the importance of strategic planning that considers financial and lifestyle aspects.
It's essential to differentiate between the "lifetime exclusion" and the "annual gift tax exclusion." The former represents the cumulative tax-free gifting amount over your life, while the latter permits you to gift a specific amount annually to individuals without triggering gift tax obligations. In 2023, this stood at $17,000 ($34,000 for a married couple) and rose to $18,000 ($36,000) in 2024. Staying within the annual gift tax exclusion ensures your lifetime exemption remains unaffected, providing a robust financial foundation.
Exceeding the annual exclusion triggers a gift tax return requirement, although actual gift tax payment may only be necessary if the gift amount surpasses your lifetime exemption. Filing the return allows the excess over the annual exclusion to be applied to your lifetime exemption, utilizing the unified tax credit. However, it's crucial to remember that this deduction reduces your lifetime exemption. For individuals focused on financial security, this financial navigation becomes integral to the broader plan for a secure and independent lifestyle.
Exploring Alternatives
Beyond direct transfers, alternative strategies exist for moving substantial amounts out of the estate without depleting the lifetime exemption, aligning with broader financial planning considerations:
Accelerated Gifting Using a 529 Plan:
Those looking to support their grandchildren's education can leverage a 529 plan. This IRS-sanctioned provision allows gifting up to five years' worth of annual gifts to a 529 plan spread over five years in alignment with the annual gift exclusion. Furthermore, from the 2024–25 academic year onwards, grandparent-owned 529 plans will not be considered income for the beneficiary student, providing an advantageous option for those navigating educational aspirations within the family context.
Direct Payment of Medical or Educational Expenses:
The IRS grants an unlimited exclusion for gifts covering qualified medical expenses or educational tuition. To qualify, the gift must not directly benefit the donor and should be directed to the medical provider or academic institution. Gifts meeting these criteria, regardless of size, require no gift tax return and leave the lifetime exclusion untouched, offering a practical and tax-efficient approach to addressing pressing financial concerns.
At Moscaret Investment Advisory and The Bridgeway Group, our commitment extends beyond traditional financial guidance. We provide our clients with extensive information to make informed decisions across taxation, investments, estate planning, and other critical financial domains. For those who confidently navigate the complexities of financial planning, a deeper exploration into strategic planning is essential. Please reach out to us if you have any questions or would like to explore this topic in detail.
*Commonwealth Financial Network® and Moscaret Investment Advisory do not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.