How Gifting Impacts Estate Plans in California

Estate planning allows you to support your loved ones after you’re gone. However, that can make the planning process feel unrewarding. You’re going through a lot of effort for results you will never see. 

That’s why many people choose to include gifting as part of their estate plans. When you gift assets to your loved ones, you can see and enjoy how your generosity improves their lives. In addition, gifting can play an important role in minimizing the tax burden on your heirs. In this article, we explain the federal and state laws surrounding gifting and estate planning and how you may benefit from implementing gifting in your plan. 

Federal Gifting Laws

The IRS imposes two limits on gifts: the annual gift exclusion and the estate and gift lifetime exclusion. 

Under the annual exclusion, you can give up to $16,000 to an individual without any gift taxes. This limit applies to each individual separately. For example, you could give up to $16,000 to your son and $16,000 to your daughter without tax implications. Couples can gift up to $32,000 to an individual as long as each spouse signs a separate check for half that amount.

The federal lifetime gift exclusion kicks in once you have exceeded the annual exclusion. For instance, if you give your child $100,000 for the down payment on a condo, $16,000 is covered under the annual exclusion, and $84,000 falls under the lifetime exclusion. You will need to file IRS Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return, to report that additional amount.

This form is used to determine how much of your lifetime gift exclusion limit you have used. In 2022, the limit is $12.06 million per person. It is indexed to inflation, so it will increase in the future. You will need to pay the gift tax if you give more than that limit in gifts above and beyond the individual annual limit during your life. 

The lifetime limit also applies to estates and inheritance taxes. You may pass on up to the lifetime gift limit in your taxable assets without triggering additional taxes. However, any gifts that exceed the lifetime gift exclusion reduce the inheritance tax threshold. In the down payment example above, you would only be able to pass on $11.976 million in assets because you had already given gifts in lieu of an inheritance while you were alive.

Exceptions to Federal Gifting Laws

Not everything you’d call a gift in your daily life counts towards either of the exclusions above. You may make the following transfers without the funds counting toward your annual or lifetime limits:

  • Giving assets to your spouse
  • Donating to qualified charities
  • Paying qualified medical bills for loved ones by directly sending payment to the healthcare professional
  • Paying tuition for loved ones by sending payments directly to the institution
  • Depositing funds in a 529 college savings plan for a qualified loved one

How Gifting May Work to Your Advantage

Depending on your circumstances, you may be able to use gifting laws to your advantage in your estate plan. Gifting can provide you with the following benefits:

Reducing the Size of Your Estate

Federal law implements an extremely high tax on high-value estates. Tax rates on large estates can exceed 40%. That’s a heavy burden to place on your heirs. However, gifting can help you reduce the size of your estate before you pass.

Giving gifts below the annual individual threshold can be a helpful strategy. This won’t lower the inheritance tax threshold, but it will reduce the size of your estate. Giving your children, grandchildren, and other loved ones amounts below the limit can help you shrink your estate or keep it below the tax threshold. As long as these gifts don’t harm your finances, it’s an excellent way to reduce the tax burden down the road.

Transferring Assets Before Expected Value Gains

Some assets have significant anticipated appreciation. For example, art collections and signed collector’s items often significantly increase in value after the creator passes away. If you have assets that may be worth substantially more in the future, gifting them now reduces the potential tax bill. 

Suppose you own a painting worth $50,000 now. If you anticipate it being worth $200,000 in a decade and want to pass it on, you can give it to your heir now. Only $34,000 will count against the lifetime limit instead of $184,000. As a result, you’re less likely to reach the gift or estate tax limit when that value is combined with the rest of your assets.

Develop Your Estate Plan With Gifting in Mind

Gift and tax laws are complex. If you want to minimize the tax burden your heirs face, you may carefully consider how to include gifting in your estate plan. The experienced attorneys at The Dayton Law Firm P.C. are prepared to help you draft a plan that helps you achieve your goals for your assets and ensure your heirs receive the assets you want to pass on, now or in the future. Schedule your free consultation to learn how.