Giving gifts isn’t just about generosity; it’s also a smart financial strategy. If you’ve built up wealth over the years, you may be thinking about how to share it with loved ones or even charities during your lifetime. The good news? Thanks to the lifetime gift tax exemption, you can give significant assets without triggering hefty taxes.
At Entrusted Legacy Law, we help Pennsylvania families navigate the rules around gifting to make the process simple and tax-efficient. Whether you’re helping your child buy their first home, transferring family land, or gifting stocks, understanding the lifetime gift tax exemption will help you share your wealth while securing your financial future. Let’s break it down in a clear, friendly way so you can make informed decisions.
Why Gifting Assets During Your Lifetime Makes Sense
Gifting assets isn’t just a kind gesture – it’s a strategic way to pass on your wealth. By giving during your lifetime, you get to witness the impact of your gifts while reducing the size of your taxable estate. In other words, you help loved ones now while also potentially saving on estate taxes later.
Imagine this: Your daughter and son-in-law want to buy a house in Philadelphia, but they’re struggling to come up with a down payment. By gifting them a portion of your assets now, you give them a leg up, help them settle into a family home, and reduce the overall size of your estate. Everyone wins.
Plus, current tax laws make gifting more favorable than ever. However, understanding the limits, benefits, and rules is key to making the most of it. That’s where the lifetime gift tax exemption comes in.
Breaking Down the Lifetime Gift Tax Exemption
Let’s start with the basics: What is the lifetime gift tax exemption?
The lifetime gift tax exemption is the total amount you can give away during your lifetime without paying federal gift taxes. In 2024, this exemption is $12.92 million per individual (or $25.84 million for married couples filing jointly). It sounds like a huge number – and it is – but it’s not unlimited. Once you exceed this threshold, any gifts you give will be taxed at rates as high as 40%.
So how does this work? Here’s an example:
You give your son $20,000 to help with tuition. The IRS allows you to give up to $17,000 per recipient annually tax-free (this is the annual gift exclusion for 2024).
The remaining $3,000 above that $17,000 annual limit counts against your lifetime gift tax exemption. If you’ve never used the exemption before, you now have $12.917 million left of your lifetime limit.
The key takeaway? You can combine the annual gift exclusion with your lifetime exemption to gift significant assets without worrying about immediate taxes. We’ll talk more about the annual limit later.
Gifting Made Easy: How to Transfer Assets During Your Lifetime
Gifting assets may sound complicated, but it doesn’t have to be. Here’s a step-by-step guide to make the process easy:
Choose What to Gift
Not all gifts are created equal. You can gift cash, real estate, stocks, or even a family business. For example, if you own a cabin in the Poconos and want your children to enjoy it now, you can transfer ownership through gifting. If you’re gifting stocks, you’re not just transferring wealth – you may also save on capital gains taxes.
Know the Annual Gift Exclusion
The IRS allows you to give up to $17,000 per recipient per year without it counting toward your lifetime exemption. This means you could give each of your children and grandchildren $17,000 annually, tax-free. For married couples, you can effectively double this amount by splitting gifts ($34,000 per recipient).
Document Your Gifts
For gifts exceeding the $17,000 annual exclusion, you’ll need to file IRS Form 709 (the gift tax return) to report the amount. This doesn’t mean you owe taxes immediately – it just keeps track of how much of your lifetime exemption you’ve used.
Work with a Professional
While gifting can seem straightforward, it’s easy to miss important details. For instance, undervaluing assets like property could result in future tax headaches. Working with professionals like us ensures your gifts are tax-smart and legally sound.
What You Need to Know Before Gifting Assets
Before you start gifting, here are a few critical things to keep in mind:
Lifetime Exemption and Estate Tax:
The lifetime gift tax exemption is tied to the federal estate tax. If you use your $12.92 million exemption during your lifetime, it reduces how much you can transfer tax-free through your estate when you pass away.
Married Couples Benefit:
If you’re married, you and your spouse can combine your exemptions for double the impact ($25.84 million in total).
Gifts for Education and Healthcare:
Direct payments for someone’s education (like tuition) or medical expenses don’t count toward your annual or lifetime limits. This is a great way to help loved ones without impacting your exemption.
For example, if your granddaughter attends Penn State and tuition is $30,000 a year, you can pay the tuition directly to the school without it being considered a taxable gift.
What Happens if You Exceed the Exemption?
If your gifts exceed the lifetime limit, any additional gifts will be subject to federal gift taxes. However, few families reach this limit, so for most people, gifting remains a powerful tool.
Why Gifting Now Could Be the Best Decision for Your Legacy
There are several benefits to gifting assets during your lifetime rather than waiting:
Reduce Estate Taxes
By transferring assets now, you shrink the size of your taxable estate. This can help your heirs avoid higher estate taxes down the line.
See the Impact of Your Gifts
One of the most rewarding parts of gifting is seeing how it improves your loved ones’ lives. Whether it’s helping your child buy their first home in Harrisburg or funding a grandchild’s education, you can enjoy the satisfaction of seeing your legacy in action.
Take Advantage of Current Laws
The current lifetime exemption is historically high but may decrease in the future. Gifting now locks in the benefits before potential changes.
Avoid These Pitfalls When Gifting Assets
Even with the best intentions, mistakes can happen when gifting assets. Here are the most common pitfalls to avoid:
Forgetting to File Form 709:
If you don’t report gifts over the annual exclusion, you could face penalties or audits.
Not Valuing Assets Properly:
Gifts of property or stocks need to be appraised accurately to avoid underreporting.
Over-Gifting:
While it’s wonderful to give, make sure you leave enough for your own needs, especially for retirement or long-term care expenses.
The solution? Work with professionals who know the ins and outs of gift tax laws to avoid costly mistakes.
Let Us Help You Make Gifting Simple and Stress-Free
At Entrusted Legacy Law, we know that gifting assets is more than just a financial decision – it’s about your legacy, your family, and your future. We’re here to help you navigate the lifetime gift tax exemption so you can make the most of your gifts while avoiding unnecessary taxes or headaches.
Whether you’re gifting a family home in Pittsburgh, farmland in Lancaster, or stocks to support a loved one’s dreams, we’ll make the process clear and simple. Our team specializes in estate planning and wealth transfer strategies that fit your family’s unique needs.
Take the First Step in Securing Your Legacy
Gifting assets during your lifetime isn’t just a smart tax move – it’s a powerful way to share your wealth, reduce estate taxes, and create a lasting impact. By understanding the lifetime gift tax exemption and working with a trusted advisor, you can ensure your gifts are as meaningful and stress-free as possible.
Ready to make gifting simple? Contact Entrusted Legacy Law today for a consultation and let us help you plan your legacy the right way.
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