Affluent investors hoping to avoid estate taxes on their assets have one handy trick to keep Uncle Sam from taking a share of their estate.
Most investors out there won’t have to worry about estate taxes, which generally apply only to wealthy individuals. However, President Biden has made multiple proposals aimed at taxing the wealthy, which is raising investor interest in avoiding estate taxes in the future. Most notably, President Biden has proposed eliminating the “step-up basis at death” loophole which allows heirs to apply a market-value basis to inherited assets and avoid paying capital gains even on highly appreciated assets.
Couple that loophole closure with increasing pressure to raise tax rates on the highest earners and wealthy investors are increasingly afraid that Uncle Sam will be carving up assets intended for friends and family. Fortunately, you can work around these anticipated tax hikes by distributing inheritable assets while you’re still alive through strategic gifting.
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For 2021, you can help your heirs avoid estate taxes by gifting them up to $15,000 each and every year (up to $30,000 if you are married and hold the property jointly). However, there is a lifetime gift exemption. For this year, it is $11.7 million ($23.4 million for married couples), which means you can give away up to those amounts during your lifetime, without having to pay gift taxes on them.
A couple of caveats: 1) Even if you don’t go above the exempted amount, you may still need to file a gift tax return with the IRS (consult your accountant); and 2) your state may also levy a gift tax. Right now, it looks like Connecticut is the only one to do so, but again, consult your accountant or attorney.
And one more important thing to know. There are some gifts that are always exempt and avoid estate taxes for which you do not need to file a gift tax return, including:
- Gifts to charities approved by the IRS (these can also be deducted from the total amount of gifts you make, for exemption purposes)
- A gift to your spouse (as long as he or she is a U.S. citizen)
- A gift to cover someone’s education tuition, if paid directly to the educational institution (does not include gifts to cover room and board, books or supplies)
- Gifts to cover someone’s medical expenses, if paid directly to the medical facility
- A gift to a political organization
By making strategic gifts during your lifetime, you can carefully divide up your estate while simultaneously ensuring that your money ends up where you intend it to and not in the pockets of Uncle Sam. If you choose to make charitable gifts, you’ll also enjoy seeing the effects of your philanthropy during your lifetime. The same consideration applies to political gifts; large contributions, for better or worse, can amplify your voice in the political conversation and help ensure that policy considerations that are important to you are a focal point.
There’s no guarantee that lifetime gift limits will fall to prior levels or that tax rates will increase, although that is certainly the direction the conversation appears to be heading. But putting inheritable assets in the hands of the people, charities, or political organizations that are important to you during your lifetime offers numerous benefits in addition to helping you avoid estate taxes.
Why not pass down potentially life-changing assets to your family while you’re still around to see them put to good use?
Are you worried about the potential for higher estate taxes down the road?
Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.Learn More