When it comes to estate planning, one question we often hear is: “Should I give assets to my family now, or wait until I pass away?” It’s a great question—and one that deserves some thought. Many people don’t realize there’s a way to gift assets during your lifetime while reducing your taxable estate. Gifting assets using the lifetime tax exemption is an excellent way to share your wealth now and benefit your loved ones while you’re still here to see the impact.
At Hailey-Petty Law Firm, we help families in Austin, San Antonio, and across Central Texas plan for their financial futures. Whether you’re looking to help your children buy their first home, support a grandchild’s education, or reduce the size of your taxable estate, gifting assets is a valuable tool to consider. In this post, we’ll walk you through how the lifetime tax exemption works, what you need to know about gifting assets, and how you can make the most of this strategy.
What Does ‘Gifting Assets’ Mean?
Gifting assets is exactly what it sounds like: giving away money, property, or other valuable assets to loved ones during your lifetime. Unlike an inheritance, which happens after you pass, gifting allows you to share your wealth now.
Examples of gifts include:
- Cash gifts (e.g., helping a child with a down payment for a home).
- Property like real estate, vehicles, or family land.
- Stocks or investment accounts.
- Family business interests or shares.
What’s important to understand is that the IRS keeps a close eye on large gifts. While you can give away assets, there are limits on how much you can gift tax-free. That’s where the annual gift tax exclusion and the lifetime gift tax exemption come into play.
Understanding the Lifetime Gift Tax Exemption: What You Need to Know
The lifetime gift tax exemption is the total amount of assets you can gift during your lifetime without paying federal gift taxes. In 2023, this exemption is $12.92 million per individual (double that for married couples). While this number may change in future years, it currently offers a generous opportunity to gift substantial assets tax-free.
But here’s the catch: any gifts you make above the annual exclusion limit count toward your lifetime exemption. The annual exclusion allows you to gift up to $17,000 per recipient per year (as of 2023) without it impacting your lifetime exemption.
Here’s an example:
If you gift $30,000 to your child this year, $17,000 is excluded, and the remaining $13,000 will reduce your lifetime exemption. You won’t owe taxes on the gift now, but it “uses up” part of your total exemption.
The good news? Most people never exceed the lifetime exemption. And even if you do, the tax rate starts at 18% and tops out at 40%. While that sounds high, careful planning can help you avoid or minimize it.
Annual Gift Tax Exclusion vs. Lifetime Exemption: Know the Difference
Let’s clarify the difference between the two:
Annual Gift Tax Exclusion
- You can gift up to $17,000 per person, per year (or $34,000 if you’re married and splitting the gift).
- Gifts under this amount don’t “count” against your lifetime exemption.
- Example: You could give $17,000 to your child, $17,000 to a grandchild, and $17,000 to a niece—all in one year—without any tax implications.
Lifetime Gift Tax Exemption
- If you exceed the annual exclusion, the excess amount reduces your $12.92 million lifetime exemption.
- You must report gifts over the annual limit to the IRS using Form 709 (Gift Tax Return).
In short, the annual exclusion is a yearly opportunity to give tax-free gifts, while the lifetime exemption provides a long-term cap for larger gifts. Using both strategically is the key to maximizing your wealth transfer.
How to Gift Assets: Step-by-Step for a Smooth Transfer
If you’re ready to start gifting assets, here’s a step-by-step approach to ensure everything goes smoothly:
1. Decide What to Gift
Think about the assets that make sense for your situation. Do you have extra cash sitting in savings? A vacation home that’s no longer being used? Stocks or business shares you’d like to pass to the next generation?
For instance, many parents in Texas gift land or property to children as part of a long-term plan to keep family assets intact.
2. Determine the Value of the Gift
For gifts like cash, the value is straightforward. For property, stocks, or other assets, you may need a professional appraisal to determine the fair market value. This ensures you’re following IRS rules and reporting accurately.
3. Use the Annual Exclusion First
Try to keep gifts under the annual exclusion limit whenever possible. For larger gifts, plan them strategically over multiple years to maximize the annual exemption.
4. File Form 709 if Needed
If you gift more than the annual limit to a single recipient, you’ll need to report it on Form 709. While no tax is owed unless you exceed the lifetime exemption, this form keeps track of your total lifetime gifting.
5. Consider Gifting Through Trusts
If you want to protect assets or control how gifts are used, consider gifting through a trust. For example, you could create a trust to pay for a grandchild’s education, ensuring the funds are used responsibly.
The Benefits of Gifting Assets During Your Lifetime
Gifting assets isn’t just about tax savings—it’s also about seeing your loved ones benefit from your generosity now. Here are some key benefits:
1. Reduce Your Taxable Estate
Gifting assets during your lifetime reduces the size of your taxable estate, which can help minimize estate taxes down the road.
2. Help Loved Ones When They Need It Most
By gifting assets now, you can help your family during critical moments. Maybe your child needs help buying their first home in Austin, or your grandchild could use funds for college tuition.
3. Maintain Control Over Your Wealth
Strategic gifting through trusts or structured gifts allows you to control how and when assets are used. This is especially helpful if you’re concerned about how younger beneficiaries will handle an inheritance.
4. Create a Lasting Legacy
Whether you’re passing down family land, funding education, or supporting a favorite charity, gifting allows you to leave a meaningful legacy that reflects your values.
Potential Pitfalls: What to Watch Out For When Gifting Assets
While gifting is a fantastic strategy, there are a few things to keep in mind:
- Exceeding the Exemption: Be mindful of how much you’re gifting over time to avoid unexpected tax liabilities.
- Medicaid Planning: Gifting assets could affect Medicaid eligibility if you need long-term care within five years.
- Loss of Control: Once you gift an asset, you can’t take it back. Make sure you’re financially comfortable before giving it away.
The key is to plan carefully and consult with professionals to avoid mistakes.
How to Make the Most of the Lifetime Gift Tax Exemption
Here are a few tips to maximize the benefits of gifting assets:
- Start Early: Spread out large gifts over multiple years to take full advantage of the annual exclusion.
- Pay for Education or Medical Expenses: Payments made directly to a school or medical provider don’t count as gifts and won’t affect your exemption.
- Use Trusts for Control and Protection: Trusts allow you to gift assets while maintaining control over how they’re used.
Conclusion: A Thoughtful Plan for Your Family’s Future
Gifting assets using the lifetime tax exemption is a smart way to reduce your taxable estate, help loved ones now, and leave a lasting legacy. By planning ahead and using this strategy carefully, you can ensure your family benefits in the most meaningful way possible.
At Hailey-Petty Law Firm, we specialize in helping families like yours navigate the ins and outs of estate planning. Whether you’re ready to start gifting assets or want to explore other ways to protect your legacy, we’re here to help.
Ready to start planning for your family’s future? Contact Hailey-Petty Law Firm today to schedule a consultation and learn how gifting assets can fit into your estate plan.