The lifetime gift exclusion and the annual gift exclusion are two important concepts to understand for clients interested in estate planning or thinking about the pros and cons of gifting assets while they're alive vs. deceased. These two exclusions can help you give gifts to your loved ones during your lifetime without incurring gift taxes or reducing the value of your estate.
The annual gift exclusion allows you to give a certain amount of money to any individual each year without incurring gift tax. In 2023, the annual gift exclusion is $17,000 per recipient. This means that you can give up to $17,000 to as many people as you'd like without having to pay gift tax. If you're married, you and your spouse can each give up to $17,000 to the same person, for a total of $34,000 per recipient.
The annual gift exclusion is a useful tool for reducing the size of your estate while you're still alive. By giving gifts each year, you can gradually reduce the value of your estate and potentially reduce the amount of estate tax that will be owed after your death.
The lifetime gift exclusion, on the other hand, is the total amount of gifts you can give over your lifetime without incurring gift tax. In 2023, the lifetime gift exclusion is $12.92 million per individual. This means that you can give away up to $12.92 million in gifts over your lifetime without having to pay gift tax. If you're married, you and your spouse can each take advantage of the lifetime gift exclusion, for a total of $25.84 million.
It's important to note that the current exclusion is set to go down to around $7 million per individual in 2026 depending on inflation.
It's important to note that if you give a gift that exceeds the annual gift exclusion amount, it will reduce your lifetime gift exclusion. For example, if you give someone $20,000 in 2023, $17,000 will be covered by the annual gift exclusion, but the remaining $3,000 will reduce your lifetime gift exclusion. It's also worth noting that the lifetime gift exclusion is portable between spouses. This means that if one spouse dies without using their full lifetime gift exclusion, the unused portion can be transferred to the surviving spouse. This is known as spousal portability.
For example, let's say that John and Jane are married and each have a lifetime gift exclusion of $12.92 million. John dies and has only used $5 million of his lifetime gift exclusion. The remaining $7.92 million can be transferred to Jane, giving her a total lifetime gift exclusion of $20.84 million ($12.92 million + $7.92 million). This can be a powerful estate planning tool for couples who want to maximize their gift-giving while minimizing their tax liability.
We are in interesting times for individuals and families that have taxable estates worth between 7 and 12 million dollars. It might make sense to consider how a potential decrease in the lifetime exclusion impacts a plan from a tax perspective for families in that range.