There are limits to the amount of assets a person can give to another person or entity without needing to pay a federal gift tax. Your generosity could come with a tax bill. However, there are ways to manage this. A recent article from Erie News Now, “What Is the Annual Exclusion for Gift Taxes?” digs into the details.

First, what is the gift tax? In formal terms, a gift is the transfer of property from one person to another when the donor receives nothing or less than full value in return. Disguising a sale as a gift gets into murky waters and is not recommended. In 2024, the annual exclusion for gift taxes is $18,000 per person, which means you can give $18,000 to as many people as you want without paying any gift taxes.

Gifting, when part of a well-thought-out estate plan, can effectively reduce tax liabilities by decreasing the estate's value. However, it’s important to note that haphazard gifting can lead to unfavorable outcomes. This underscores the need for strategic planning and the guidance of an experienced estate planning attorney.

When you do need to pay a gift tax, it’s high—anywhere from 18% to 40%. It was designed to prevent people from using gifts to avoid estate taxes, which is why there is a lifetime gift limit.

The lifetime exemption is the total value you can give away during your lifetime before federal gift or estate taxes are required. In 2024, this limit is set at $13.61 million. Understanding this concept is key to managing your gifting strategy effectively.

Think of the gift and estate taxes as two parts of the same pie. The gift tax applies to gifts made while you are living, while the estate tax is when you have passed and is based on the total value of your estate.

Together, the lifetime and annual exclusions provide flexibility and opportunities for managing taxes in estate planning.

Consult with an estate planning attorney before making large gifts or a series of large gifts. Some tax pitfalls must be avoided, and penalties for gift tax missteps are costly.

Reference: Erie News Now (April 5, 2024) “What Is the Annual Exclusion for Gift Taxes?”