Due to recent and upcoming changes in the law, now may be an opportune time to reexamine your estate plans and consider taking advantage of the lifetime gift tax exemption. With the passage of the Tax Cuts and Jobs Act in 2017, the lifetime exclusion amount for estate, gift, and generation-skipping taxes doubled from $5.49 million to $11.18 million per individual. Beginning with the 2024 tax year, the IRS raised the exclusion amount to $13.61 million for an individual and $27.22 million for a married couple.1
This means that each individual can gift up to $13.61 million in assets without tax implications either during their lifetime or upon death. Assets that exceed the $13.61 million exclusion amount may be taxed at a rate of 40%.
It’s important to note that this increased exclusion amount is not permanent. If Congress does not act to extend this higher exclusion, it will sunset on Jan. 1, 2026. At that time, the exclusion is expected to roughly halve to around $7 million, adjusted for inflation. Given the temporary nature of this increased exclusion amount, it’s vital to think about whether you should arrange to gift the assets now or to have them pass to your beneficiaries when you pass away.
To help in your evaluation and discussion of potential estate plan changes, there are two important points to consider:
1. The asset’s growth potential
In general, the higher the expected appreciation for an asset, the more value there is in gifting today. This is especially true if your net worth is nearing the exclusion amount or is expected to reach the exclusion amount at your death. The reason is that the growth potential of your assets increases your net worth and, upon your death, every dollar that exceeds the exclusion amount will be taxed. By removing potentially high growth assets from your estate while they are still lower in value, you are allowing future appreciation to grow outside of your estate, thereby eliminating the necessity of paying taxes on that appreciation.
For example, if you have a real estate investment that is poised for exponential growth in the coming years, giving the property away today may be an advantageous approach. Similarly, if your business is in its early stages, it may be best to give it away today, rather than gifting ownership in the business after it has matured.
2. Whether or not the asset has a low-cost basis
When you gift assets to your beneficiaries upon your death, such as qualified stocks, real estate, or other capital assets, they get a “step-up” in basis, meaning the value of your assets is adjusted by the IRS to reflect the change in market value at the time of the inheritance. This is significant because the step-up in basis effectively eliminates the tax on gains. For example, if you have a piece of property with a purchase price of $50,000, the basis, but that is worth $3 million at the time of your death, the basis would be stepped up to $3 million. As a result, your beneficiaries could sell the property without recognition of the gains and, therefore, not owe tax on those gains.
Thus, if you have assets that have a low-cost basis, it may be better to have these assets pass to your beneficiaries after your death, rather than gifting them during your lifetime. This is particularly true for assets that have already appreciated significantly or those that may not appreciate greatly between now and the time of your passing.
Choosing to gift assets outright or via trust
Once the decision to gift has been made, you should consider whether to gift the assets directly or through a trust. On rare occasions, an outright gift may make sense. For example, it may be the better choice when you’re considering giving $10,000 to your child as a birthday gift or providing for a down payment on a house.
For most other scenarios, however, using a trust to gift your assets is a better approach as some beneficiaries may not manage or spend those gifts responsibly, or your heirs may be too young to handle significant wealth. Even with beneficiaries who are well-equipped to manage their wealth, a trust can help protect them from potential or unexpected risks due to the built-in protections of a trust and because you control the timing, conditions, and distribution amounts.
Utilizing a trust can also help with mitigating taxes. A grantor trust, designed to provide tax- free growth to beneficiaries, and a dynasty trust, which allows you to pass assets to multiple generations free of estate taxes, can be particularly beneficial with the current high exclusion amount.
Since every gifting situation is unique, consulting with a tax or estate specialist is the best first step. At Mercer Advisors, we have a team of accountants and estate strategists that collaborate with our advisors. If you’re not a client of Mercer Advisors, and want guidance with gifting strategies, let’s talk.
1. What is the Gift Tax Exclusion for 2024?”, Kiplinger, Apr. 21, 2024
