Tag Archives: taxable estate

Plan for Year-End Gifts with the Gift Tax Annual Exclusion

Posted on
by
1
Plan-for-Year-End-Gifts-with-the-Gift-Tax-Annual-Exclusion

With the holidays just around the corner, many people may want to make gifts of cash or stock to their loved ones. You can plan for year-end gifts with the gift tax annual exclusion. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax.

Exclusion for 2023

For 2023, the exclusion amount is $17,000. The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $51,000 to the children this year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return.

If annual gifts exceed $17,000, the exclusion covers the first $17,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability, thanks to the unified credit (discussed below).

Please note this discussion isn’t relevant to gifts made to a spouse because those gifts are free of gift tax under separate marital deduction rules.

Married Taxpayers Can Split Gifts

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is given by only one of you. Thus, by gift-splitting, up to $34,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $204,000 each year to their children and to the children’s spouses ($34,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $17,000 is being given to a single individual in any year.

Unified Credit for Taxable Gifts

Even gifts that aren’t covered by the exclusion, and are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.92 million for 2023. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else don’t count toward the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $17,000 as a gift.

Annual gifts help reduce the taxable value of your estate. The estate and gift tax exemption amount is scheduled to be cut drastically in 2026 to the 2017 level when the related Tax Cuts and Jobs Act provisions expire (unless Congress acts to extend them). Making large tax-free gifts may be one way to recognize and address this potential threat. They could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

Questions? We Can Help

As you plan for year-end gifts with the gift tax annual exclusion, you may still have questions. That’s why we’re here. The knowledgeable personal tax professionals at Ramsay & Associates can help with all your estate, trust, and gift tax concerns. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Essential Estate Planning Strategies

Posted on
by
Reply
Essential-Estate-Planning-Strategies

When it comes to estate planning, there’s no shortage of available techniques and strategies. If applicable, the two specific strategies discussed here should be used to reduce your taxable estate and ensure your wishes are carried out after your death. Keep reading to learn more about these essential estate planning strategies.

Take Advantage of the Annual Gift Tax Exclusion

Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).

For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receives $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).

What if the same amounts were transferred to the recipients upon Jim’s or Joan’s deaths instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer tax exemption was available, the tax hit would be at the current 40 percent rate. So, making annual exclusion gifts could potentially save the family a significant amount in taxes.

Use an Irrevocable Life Insurance Trust to Hold Life Insurance

If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).

An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.

Are These the Right Strategies for You?

Bear in mind that these two essential estate planning strategies might not fit your specific estate plan. We can provide you with additional details on each and help you determine if they’re right for you. Contact the estate planning professionals at Ramsay & Associates with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

How to ensure life insurance isn’t part of your taxable estate

Posted on
by
Reply

ensure life insurance isn’t part of your taxable estate

If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.

Current exemption amounts

For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.

In or out of your estate

Under the estate tax rules, insurance on your life will be included in your taxable estate if:

  • Your estate is the beneficiary of the insurance proceeds, or
  • You possessed certain economic ownership rights (called “incidents of ownership”) in the policy at your death (or within three years of your death).

It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.

The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:

  • The right to change beneficiaries,
  • The right to assign the policy (or revoke an assignment),
  • The right to pledge the policy as security for a loan,
  • The right to borrow against the policy’s cash surrender value, and
  • The right to surrender or cancel the policy.
  • Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.

Buy-sell agreements and trusts

Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).

An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.

The three-year rule

If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)

Contact us if you have questions or would like assistance with estate planning and taxation.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.