There are two major tax exclusions available to every United States citizen - the estate tax exclusion and the gift tax exclusion.
What is the difference between an estate tax and a gift tax?
An estate tax applies to transfers of property that are made after an individual has already died.
A gift tax applies to transfers of property made when an individual was still alive.
So the gift tax exclusion (or as it is also often referred to the gift tax exemption) allows individuals to give away a certain value of assets to any number of people within a single year, and not have to incur any taxes on this gift. Interestingly, any amount over the annual gift exclusion can still roll over into your lifetime estate tax exclusion, but then you (the gift giver) must file a federal gift tax return, Form 709.
In 2023, the gift tax exclusion was set at $17,000 per person (or $34,000 per married couple). What this truly means is that any one donor can gift the exclusion amount - or any amount lower than this - to as many people in the world as he or she wants every year with no tax ramifications. Starting in January of 2024, the tax exclusion amount will be increased to $18,000 per person.
Some interesting techniques that we have seen clients adopt over the years using the gift tax exclusion include using Gift Trusts to transfer larger sums of money for the benefit of a client's grandchild/grandchildren - this strategy allows for the money to be under the control of a third party fiduciary (potentially the grandchild's parent) while getting it out of the gifting client's estate. This type of planning can allow for a very rapid transfer of wealth depending on the family dynamics. For example, a married couple with three children and five grandchildren could gift $252,000 per year under 2024 gift tax rate ($18,000 x 2 = $36,000; $36,000 x 7 beneficiaries = $252,000).
If you would like to set up an appointment to discuss opportunities for lifetime gifting please feel free to reach out to our office.