Are you worried about the estate tax your children will have to pay after you pass away? If so, there's one amazing tax break that can reduce the potential tax burden for everyone.

The Annual Exclusion Gift

Using what's called your "annual exclusion gift," you can pass a surprising amount of wealth to the next generation tax-free. Let's review of the tax rules that allow for this exclusion:

  1. Every tax year, you are allowed to give $17,000 each (as of 2023) to as many people as you like without worrying about the recipient paying a gift tax or the amount still counting towards your estate.
  2. As of 2023, the estate tax is 40% of all estates worth more than $12.92 million. This figure is subject to yearly review by the IRS.
  3. As of 2023, the gift tax is 40% for all gifts in excess of $12.92 million. This figure is subject to yearly review by the IRS.

Year-End Gifting: Case Study

You can use that $17,000 yearly gift to reduce the value of your estate until it is below the estate tax threshold. Here's how it works. John and Jane are a married couple with three grown children. Their financial advisor calculates their estate value at $13.2 million. That's clearly above the $12.92 million mark. This means their three kids would have to pay a 40% estate tax if John and Jane passed away this year. Let's see how that tax burden gets reduced by using annual exclusion gifts.

  1. John and Jane choose family members to receive a yearly gift. If they have three kids, and each has a spouse and two children, that's a total of 12 people who can receive gifts.
  2. John gives $17,000 each to his 12 family members. That's a total of $204,000.
  3. Jane gives $17,000 each to the same 12 family members. That's also a total of $204,000.

Using this strategy, John and Jane reduced the value of their estate by $408,000 in one tax year. The value of their estate drops from $13.2 million to $12.79 million — below the estate tax threshold. That means instead of paying a 40% tax on $13.2 million ($5,280,000), John and Jane's children now pay zero tax to inherit their parents' estate.

If you could put your children on the road to financial success with money you already have, wouldn't you do it?

To get started with a gifting strategy, call me or send me an email today!

Always consult your accounting, legal, and tax advisors before implementing any recommendations. This material does not constitute tax, legal, or accounting advice. It cannot be used for the purpose of avoiding any IRS penalty.