Estate Planning Gifting Strategies

Estate planning is an essential process in safeguarding your financial legacy. Gifting strategies are a crucial component of estate planning, as they offer many benefits for you, and your beneficiaries. In this post, you’ll explore the various estate planning gifting strategies that can help maximize the impact you’re able to have on the people and causes you care about. 

Lifetime Gift Exclusion

The lifetime gift exclusion is a provision of the U.S. federal tax code. It allows you to make gifts to others without incurring gift tax or reducing the amount of your estate tax exclusion. The lifetime gift exclusion is cumulative, meaning that all of your gifts during your lifetime count towards your lifetime gift tax exclusion limit. 

As of 2023, the lifetime gift exclusion is $12.92 million per individual ($25.84 for married couples). The exclusion is indexed for inflation each year, so it can increase over time. When you make a gift that exceeds the annual gift exclusion (see next section), the exceeding amount counts toward your lifetime gift exclusion. However, if you make gifts that exceed your lifetime exclusion amount, you will be subject to gift tax on the amounts that go over (which can be as high as 40%).

Using the lifetime gift exclusion allows you to transfer substantial wealth to your loved ones. On top of significant tax savings, utilizing the lifetime exclusion also allows you to reduce the size of your taxable estate, which, in some cases, may even eliminate your need to pay federal estate taxes as well. 

Please Note: Presently, the Tax Cuts and Jobs Act is set to expire at the end of 2025. As a result, starting in 2026, the federal gift and estate tax exemption will be returning to its pre-2018 level ($5,000,000 for individuals) with up-to-date adjustments for inflation. 

Annual Exclusion

The annual gift tax exclusion is another provision of the federal tax code that allows you to make gifts each year without incurring gift tax or reducing your lifetime gift exclusion amount. Your annual gift tax exclusion is separate from your lifetime exclusion and resets each calendar. 

As of 2023, the annual gift tax exclusion is $17,000 for individuals. However, for those who are married, you can combine your annual gift tax exclusions to give a total of $34,000. Using an annual gift tax exclusion allows you to transfer wealth to those you care about in a tax-savvy way. You can use your annual exclusion to avoid incurring gift tax or tapping into any of your lifetime gift exclusion.

Education Gifting Strategies

Estate planning gifting strategies can be an effective way to support educational institutions, lower your taxable estate, offer financial support to those you care about, and make use of your lifetime and annual gift exclusion amounts. Here are some major educational gifting strategies you may want to consider:

Direct Tuition Payments: Paying tuition directly to your loved one’s educational institution can help reduce the size of your taxable estate. This unlimited strategy is exempt from gift tax and is separate from your annual gift tax exclusion. 

Scholarships and Grants: Establishing a scholarship or grant program can provide educational gift aid to your loved ones while simultaneously creating a philanthropic legacy. This strategy can offer tax benefits as well, as contributions to scholarship programs can be tax-deductible.

Educational Trusts: Establishing an irrevocable trust specifically to cover the educational costs of a loved one can allow you to set the terms and conditions of how your gifted assets are to be used, support multiple beneficiaries, and protect your assets from creditors and irresponsible family members. 

Uniform Gifts to Minors ACT (UGMA) and Uniform Transfers to Minors Acts (UTMA) Accounts: UGMA and UTMA accounts enable the transfer of assets to a minor without the need for a formal trust, and these assets can be used for educational purposes. However, upon reaching the age of majority, which varies between 18 and 21 depending on the state, your beneficiary will gain complete control over the account.

529 College Savings Plans: 529 plans are tax-advantaged investment accounts specifically designed to help you save for education costs. Contributions are considered gifts by the IRS and can grow tax-free. Withdrawals made for qualifying educational expenses are also tax-free. It’s important to note that individuals (and married couples) can also contribute up to their annual gift tax exclusion per child each year with no gift-tax consequences. 

You can also use a superfunding strategy that allows multi-year (up to 5 years) lump sums of your annual gift tax exclusion in a single year. Just know that you won’t be able to give any more for the duration of the years you’ve contributed in advance. 

Medical Gifting Strategies

Direct Payment of Medical Expenses: Similar to direct tuition payment, you can also make direct payments to medical service providers on behalf of your loved ones. This unlimited strategy is also exempt from gift tax and is separate from the annual gift tax exclusion. 

Health Savings Accounts (HSAs): Designed to assist individuals with eligible high-deductible health plans, HSAs offer tax benefits such as deductible contributions and tax-free withdrawals for qualified medical costs. Though they are typically utilized for one’s own medical expenses, HSAs can also cover qualifying expenses for a spouse or dependents. However, it is important to note that HSA gift contributions must not surpass the specified individual or family limit for the account.

Special Needs Trusts: If someone you love has special needs or a disability, creating a special needs trust may be worthwhile. These trusts can help provide for their medical care without jeopardizing their eligibility for government benefits like Medicaid or Supplemental Security Income. Additionally, a special needs trust can help protect your gifted assets and make sure they are distributed as you see fit. 

Charitable Gifting Strategies

Donating to charitable organizations can provide personal satisfaction along with tax advantages. There are various methods of charitable gifting, and you can learn more about ones that may be relevant to you below: 

Donor-Advised Funds (DAFs): Donor-Advised Funds (DAFs) allow you to make an irrevocable contribution to a public charity or community foundation (a sponsoring organization), which establishes and manages the fund on your behalf. 

Charitable Remainder Trusts (CRTs): A Charitable Remainder Trust (CRT) is a type of irrevocable trust that provides you or your selected non-charitable beneficiaries with a revenue stream for a set duration of time. After this time period concludes, the remaining assets in the trust are distributed to the charitable beneficiaries of your choice.

Charitable Lead Trusts (CLTs): Charitable Lead Trusts (CLTs) can be thought of as inverse CRTs. With a CLT, income that’s generated by the trust is paid out to designated charitable beneficiaries for a specified time period. After that, the remaining assets are eventually distributed to the trust’s non-charitable beneficiaries, which are often family members or other loved ones. 

Private Foundations: A private foundation is a separate legal entity that’s financed by an individual, family, or corporation. The foundation distributes grants to other charitable organizations and can provide you, the donor, with significant control over how the funds are distributed. 

Bequests and Testamentary Gifts: Including charitable organizations in your will or living trust allows you to make a lasting impact after your passing. This strategy can help lower your taxable estate and allows you to leave a legacy that continues to support your philanthropic vision. 

Other Estate Planning Gifting Strategies

Family Limited Partnerships (FLPs)

Family Limited Partnerships (FLPs) are an effective estate planning gifting strategy that facilitates the transfer of assets and wealth within a family while also minimizing tax liabilities and protecting the family’s assets. 

An FLP is a legal entity created by family members who contribute assets such as real estate, investments, or a family business. The partnership is then divided into general partnership interests, held by general partners who manage the FLP, and limited partnership interests, held by limited partners. Unlike general partners, limited partners have no management control but do benefit from the FLP’s income and growth.

FLPs allow for a gradual transfer of wealth to typically younger generations by gifting limited partnership interests, which reduces the value of the older generation’s estate and potential estate tax liability after their passing. Valuation discounts are applied to the gifted limited partnership interests due to the lack of control and marketability associated with them. This allows more wealth to be transferred without exceeding the annual or lifetime gift tax exclusion amounts.

Additionally, as a pass-through entity, FLPs allow for income and deductions to flow through to the partners, avoiding double taxation. By using an FLP as an estate planning gifting strategy, families can transfer wealth to the next generation, reduce potential estate tax liabilities, protect their assets, and take advantage of unique tax benefits.

Grantor Retained Annuity Trusts (GRATs)

Grantor Retained Annuity Trusts (GRATs) provide a means for individuals to pass assets to their beneficiaries while reducing their gift and estate tax implications. A grantor establishes an irrevocable trust, contributes assets to it, and retains a right to receive fixed annuity payments over a specified period of time. Upon the term’s conclusion, any residual assets in the trust are distributed to the designated beneficiaries.

GRATs are particularly advantageous in times of low interest rates and anticipated significant asset appreciation. The beneficiaries’ gift value is determined by deducting the annuity payments’ present value from the assets’ initial value contributed to the GRAT. This calculation relies on the IRS Section 7520 rate, which factors in current interest rates.

Should the trust’s assets appreciate at a rate exceeding the Section 7520 rate, the additional appreciation is transferred to the beneficiaries without incurring gift or estate taxes. This approach allows the grantor to potentially transfer significant amounts of wealth to future generations while minimizing tax burdens.

Irrevocable Life Insurance Trusts (ILITs)

Irrevocable Life Insurance Trusts (ILITs), enable individuals to offer financial security to their beneficiaries while minimizing estate and gift taxes. The ILIT holds ownership of the grantor’s life insurance policy. Then, upon the grantor’s death, the life insurance policy proceeds are distributed to the trust beneficiaries.

By utilizing an ILIT, the grantor removes the life insurance policy from their taxable estate, reducing potential estate tax liability. The grantor can then make annual tax-free gifts to the ILIT to cover the policy premium costs up to the annual gift tax exclusion limit. 

How CW O’Conner Can Help You Further

At CW O’Conner, we understand the importance of creating a comprehensive estate plan that meets the unique needs and goals of each of our clients. Through the use of various gifting strategies, we help you make a greater impact on your loved ones and the causes you care about. 

Our expert team is committed to providing personalized advice and guidance, ensuring that your financial legacy is secure and your estate planning objectives are met in a way that helps you save on taxes too. Don’t wait to make the most of your estate planning gifting strategies. You can reach out to us directly at 770-368-9919, or fill out a contact card, and we’ll reach out to you. 

The opinions and analysis expressed herein are based on C.W. O’Conner Wealth Advisors, Inc. research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.

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    Cliff O'Conner

    Cliff is the founder and president of C.W. O'Conner Wealth Advisors, Inc. Cliff earned a Bachelor of Business Administration degree in Accounting from Georgia State University.

    Kevin O'Conner

    Kevin O'Conner is a financial planner with C.W. O'Conner Wealth Advisors, Inc. He earned a Bachelor of Business Administration degree in Business Management from Georgia College, and is a Certified Investment Management Analyst (CIMA).