As with past election years, 2024 has thus far been full of promises and threats from both sides of the political aisle. Taxes are always a common topic but have recently proven to be especially concerning as conversations arise about capital gains and estate tax changes.
Regardless of who wins the presidency in November, a tax strategy is a key element of planning your estate for your loved ones. One strategy to consider is gifting some of your estate before your death to take advantage of certain tax benefits. Read on to learn how this works and whether giving away your assets early is a good idea.
Current tax provisions for your estate
The only guarantees in life are death and taxes—or so they say. You pay taxes when you earn, spend and give money to your loved ones after your death, assuming your estate is large enough to be taxable.
Currently, the IRS offers two provisions to limit the estate taxes your heirs must pay after you die: the gift tax exclusion and the estate tax exclusion. Together, these provisions make up the unified tax credit. Here’s how they work:
Gift tax exclusion
As of 2024, individuals can give up to $18,000 to any other person per year without reporting it to the IRS or it counting against the gifter’s lifetime estate exemption. This means that you could give up to $18,000 in cash or equivalent gifts to as many people as you want each year. Your spouse can do the same with their own individual limit.
Estate tax exemption
You also have a basic estate tax exclusion of $13,610,000 in 2024. This means that your heirs won’t pay any estate taxes—which currently top out at 40%—on assets transferred after your death as long as the total doesn’t exceed that limit. This includes everything that you pass on to your beneficiaries, including your real estate property, investment portfolio, savings accounts, retirement accounts, valuables and more.
Concerns with current estate tax laws
The biggest worry with today’s estate tax provisions is that they are set to change at the end of 2025, and they may continue to drop in the years that follow.
In 2017, President Trump passed the Tax Cuts and Jobs Act (TCJA). This bill provided a number of changes to the estate and gift tax exclusion limits, including doubling the basic exclusion amount for tax years 2018–2025.
Thanks to this, the federal lifetime gift tax exemption for each individual jumped from just $5.49 million in 2017 to $11.18 million in 2018 (and now $13.61 million in 2024). This excludes any gifts you give away while you’re still alive, up to $18,000 per year per individual.
Yes, that may seem like a large number. In fact, less than 1% of beneficiaries paid any estate tax in 2022, according to the Census Bureau. However, these temporarily elevated limits expire next year. If you were to pass away on or after Jan. 1, 2026, your estate tax exemption would be about half what it is today with the current laws in place. After adjustments for inflation, the exemption is expected to be around $7 million for 2026 and beyond.
This is where politics comes into play, especially during an election year. If Donald Trump wins the White House again, it stands to reason that he might extend the TCJA exemption limits into 2026 and further.
If Kamala Harris were to win, however, it’s highly unlikely that we would see any substantial increase in these limits while she’s in office. She was an outspoken critic of the TCJA when it was first passed and even advocated for policies that would reverse many of its intended effects. She has also suggested eliminating the step-up basis and introducing taxes on unrealized gains, which could result in your beneficiaries paying more than you might expect in taxes—and potentially selling off your assets to cover that IRS bill—when you die.
Giving away your estate early
If you have a valuable estate, you might worry that impending tax changes could cut into your beneficiaries’ inheritance. While it’s hard to know exactly what tax changes the future holds, regardless of the election outcome, there is one option to consider: parsing out some of your assets while you’re still alive.
This could include:
- Distributing cash gifts
- Deeding over real estate
- Transferring business interests or securities
As long as your annual gifts don’t exceed the gift tax exclusion, both you and your recipient can transfer assets before your death without tax consequences.
Say you have 15 grandchildren and want to contribute toward their future educational expenses. You could write 15 checks for $18,000 each this Christmas without needing to report it to the IRS, for a total of $270,000 in tax-exempt gifts.
If you’re married, your spouse could double your efforts. Together you’d be able to gift a total of $540,000 to your 15 grandchildren without touching your lifetime estate exemption or requiring anyone to pay gift taxes. You could then do the same thing next year and the year after, strategically chipping away at your estate.
However you plan to distribute your estate, there are a few considerations you’ll want to keep in mind:
Does this apply to me?
Estate tax planning is an obvious concern for high-net-worth individuals, but is this something that should worry the average U.S. adult?
While it’s true that the majority of estates will pass to their beneficiaries without triggering taxes, it’s hard to say what lawmakers will change in the future. For instance, elimination of the step-up basis could be a concerning change for many Americans.
Today, inherited homes are passed down to beneficiaries at their current (stepped-up) market value. This means that if your parents bought their house for $200,000 in 1980 but pass it to you at a value of $1.3 million, you’re only taxed on the amount above $1.3 million if and when you sell the property. Without the step-up basis, though, you’d potentially owe taxes on $1.1 million or more of that home’s value.
Even if you don’t have an estate worth tens of millions of dollars, gifting some of your assets could be an approach to consider as tax codes evolve in the years to come.
How valuable is your estate?
The current estate tax exemption limits are due to sunset in 2025, so it’s important to consider not only your estate’s future value but also how tax laws could change. If you own a business, have a valuable stock portfolio or expect your real estate assets to grow exponentially, you could find yourself worrying about estate taxes, even if you aren’t “ultra-wealthy.”
It’s also important to remember that in 2008, the total estate exemption limit was only $2 million. Once you account for home values, retirement assets and other savings, even middle-class families could be affected, if the exemption ever drops back down to these limits.
How much do you have to live on?
Gifting your assets can be a wise strategy—as long as you don’t leave yourself in a tough spot financially. Make sure that you have enough cash and cash-generating assets to cover your retirement expenses. Don’t forget to account for unexpected ones like long-term healthcare. If you give away income-producing assets like rental properties, account for that loss of income in your annual budget.
Which assets do you own?
It may not make sense to transfer all types of assets before your death. Gifting low-basis assets early, for example, can eliminate many of the tax benefits that your loved ones might have otherwise received. For example, if you purchased your home decades ago at a much lower price than its current value, your heirs would benefit from the step-up basis upon your death. Gifting them your home early would negate that benefit and leave your loved ones on the hook for taxes for all of those capital gains.
Gifting voting shares would also mean giving away control, which you might not want to do while you’re still around. Additionally, giving away cash now only makes sense if you can still afford to maintain your quality of life.
Can your beneficiaries manage your assets?
For many of us, the only thing worse than the IRS taking a share of our estate would be watching our loved ones waste it. And in some cases, you might not be able to trust your children, grandchildren or other beneficiaries with assets or cash just yet.
If this is the case, consider using a trust to begin gifting assets without giving access to them.
According to Asher Rubinstein, an asset protection lawyer and partner at Gallet, Dreyer & Berkey in New York, this is a common and tax-efficient strategy. “Many clients set up family limited partnerships (FLPs) and put assets ([like] real estate, securities, business interests, etc.) into the FLP,” he says. “The clients, while they are alive, gift [limited partnership] (LP) interests to their children, thus lowering the parents’ estate tax liability, but the parents retain the General Partner interests.
“The parents still control [everything], even if they have gifted most or all of their LP interests,” he adds.
Should I give away my estate early?
Whether or not distributing your assets early is the right call depends on your financial situation and the resources available to you. If you’re concerned about leaving your loved ones with a large estate tax obligation—either because of your current net worth or potential tax changes in the future—gifting cash, securities and other assets now can significantly reduce your estate’s value.
Between the annual gift tax and lifetime estate tax exclusions, you can strategically chip away at your assets and reduce your beneficiaries’ tax burden long before you pass.
Photo by Inside Creative House/Shutterstock
