How to Reduce Estate Taxes with Annual Family Gifts
How Can Family Gifting Reduce Estate Taxes?Annual family gifts reduce estate taxes for individuals who have funds that they want to turn into tax-exempt gifts. You may be nowhere near the exemption limit for federal estate taxes (currently $11.4 million). But the Massachusetts limit is much lower- $2 million per person- and includes assets you may not consider part of your estate, like life insurance proceeds, the equity in your home, and retirement accounts. As a result, many middle class families are affected by the Massachusetts estate tax, and could face a heavy tax burden without careful planning.
Shrinking your estate taxes is about making sure your hard-earned and meticulously-saved money will be used for purposes important to you — like paying for your grandchildren’s college educations — not going into government pockets. There are many tools available to an estate planning lawyer to shelter assets without giving them away, but sometimes you simply have to reduce the overall size of your estate in order to minimize tax liability. By starting to give your wealth away now, you minimize and avoid estate taxes that otherwise could eat up your wealth. If that sounds confusing, don’t worry. Here’s everything you need to know about how annual family gifts reduce estate taxes. |
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How Annual Family Gifts Work
One way to reduce estate taxes is to cut the value of your estate by giving annual gifts. An annual family gift, often called an exclusion gift, is simple: It’s a gift that qualifies for annual exclusion from federal gift taxes. This means you won’t have to pay taxes on that specific amount. Under the federal tax laws, you can give away a certain amount of money to any given person each year without having to pay a gift tax. Once that money is given away, it is no longer part of your estate and therefore will also not count for estate tax purposes.
Annual giving usually includes gifts of:
For example, if you are a parent or grandparent, you would be given an annual exclusion amount to gift, which you can give to an unlimited number of people like grandchildren, children, nieces, nephews, etc., during that year. If your children are married, you can gift $18,000 to your child and another $18,000 to their spouse, to increase the amount you can move out of our estate in a single year. If your child has three children, you can gift $18,000 for each child into a trust or college savings account established for those children. Gifts aren’t restricted to family — non-family members can receive gifts, too.
Annual giving usually includes gifts of:
- Cash
- Stocks
- Bonds
- Real estate
- Family loan debt forgiveness (that doesn’t exceed annual gift tax exclusion)
For example, if you are a parent or grandparent, you would be given an annual exclusion amount to gift, which you can give to an unlimited number of people like grandchildren, children, nieces, nephews, etc., during that year. If your children are married, you can gift $18,000 to your child and another $18,000 to their spouse, to increase the amount you can move out of our estate in a single year. If your child has three children, you can gift $18,000 for each child into a trust or college savings account established for those children. Gifts aren’t restricted to family — non-family members can receive gifts, too.
How Much Can You Gift to Reduce Tax?
The amount is set each year by the IRS through a revenue procedure and is usually published in early November for the following year.
The annual gift exclusion amount is $18,000 for 2024. And married couples can combine their giving power to collectively gift $36,000 to one recipient.
Also, you should know that annual gifts made during your lifetime don’t count towards the lifetime federal limit, unless you give more than the annual limit. For example, if you gift someone $20,000, the excess $5,000 will reduce your lifetime estate and gift tax exemption by that much – and you’ll owe taxes on it as well.
If you have an ownership interest in a small business as part of your estate, you can also give away interests in that business as part of your annual gifting strategy. If the business is "closely held," meaning it is not a publicly traded company (most family businesses are closely held), the IRS allows you to discount the valuation of the business for purposes of determining the value of a gift of shares. You are also allowed to discount the value of the ownership interest if what you are giving away is not a majority or controlling interest. This is often the first place people should look for a gifting strategy, because it allows you to move more real value out of your estate within the gift tax limits than if you were to give away liquid assets like cash or publicly traded stocks.
The annual gift exclusion amount is $18,000 for 2024. And married couples can combine their giving power to collectively gift $36,000 to one recipient.
Also, you should know that annual gifts made during your lifetime don’t count towards the lifetime federal limit, unless you give more than the annual limit. For example, if you gift someone $20,000, the excess $5,000 will reduce your lifetime estate and gift tax exemption by that much – and you’ll owe taxes on it as well.
If you have an ownership interest in a small business as part of your estate, you can also give away interests in that business as part of your annual gifting strategy. If the business is "closely held," meaning it is not a publicly traded company (most family businesses are closely held), the IRS allows you to discount the valuation of the business for purposes of determining the value of a gift of shares. You are also allowed to discount the value of the ownership interest if what you are giving away is not a majority or controlling interest. This is often the first place people should look for a gifting strategy, because it allows you to move more real value out of your estate within the gift tax limits than if you were to give away liquid assets like cash or publicly traded stocks.
How We Can Help
At slnlaw, we specialize in providing tailored estate planning solutions to help middle-class families maximize their assets and minimize estate taxes. Our experienced estate lawyers will work closely with you to develop personalized strategies, including leveraging annual family gifts, optimizing gift tax exclusions, and exploring the benefits of irrevocable trusts. With our expertise in tax planning and estate law, we ensure that your hard-earned assets are preserved for your loved ones, not lost to unnecessary taxes. Let us guide you through the complexities of estate planning and secure your family's financial future. You can use the button below to schedule a free information call, or give us a call at (781) 784-2322.
Meet Our Estate Planning Lawyers
Emily Smith-Lee is the owner and founder of slnlaw. She is a 1996 graduate of Boston College Law School. She was previously a partner at the Boston office of a large international firm, where she worked for thirteen years before starting the firm that became slnlaw in 2009. She has been recognized as Massachusetts Superlawyer each year since 2013, and in 2018 earned recognition as one of Massachusetts Lawyers Weekly's Lawyers of the Year.
Jenna Ordway: Jenna is a 2013 graduate of Quinnipiac Law School, and also earned an LLM in Taxation from Boston University in 2015. She has been affiliated with slnlaw since 2011, first as a law clerk and then as an attorney. Jenna has been recognized since 2019 as a "Rising Star" by Massachusetts Superlawyers. Jenna wrote a book on estate planning: The Road to Peace of Mind: What You Need to Know About Estate Planning. Jenna has helped many individuals and families with planning to protect their legacies and loved ones, and planning for the future and succession of their businesses.
Sharleen Tinnin: Sharleen is a 2010 graduate of Northeastern University School of Law, and earned her LLM in estate planning from Western New England Scool of Law in 2016. She has been with slnlaw since 2023. Prior to joining slnlaw, she worked with King, Tilden, McEttrick & Brink, P.C. on complex civil litigation matters. She previously worked for the United States Department of Justice, and received an "Excellence in Justice" award in 2017. Sharleen has helped many clients with planning for their legacies and their future, and navigating the probate process in Massachusetts after the death of a loved one.
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