Estate Tax and Lifetime Gift Amounts: What You Need to Know

For many people, effectively managing significant wealth includes deepening their understanding of gift taxes and estate planning.

That’s because the subtleties of federal gift tax exclusion rules, the annual gift and estate tax exemption and changes in these limits can have significant impacts on your estate and its beneficiaries.

With a clearer understanding of these tax concepts, however, you may make more informed decisions about how to transfer assets within your lifetime and beyond. This may help reduce your tax liabilities and ensure your gifts benefit your chosen heirs as you envision.

Below are the basics of what you need to know about gift taxes and lifetime gift amounts — and how they may impact you, as a benefactor, and your beneficiaries.

What is the gift tax exclusion?

The gift tax is a tax on property transfers made by a living individual, without payment or a valuable exchange in return. Thus, it can be a beneficial tool for wealth transfer during one’s lifetime.

The benefactor — not the beneficiary (or recipient) — is typically liable for the tax.

At the time of this article’s initial publication, the gift tax exclusion allows individuals to make tax-free gifts up to a specific amount each year. In 2024, the annual exclusion¹ is $18,000 per recipient — or $36,000 for married couples who choose gift splitting (for a definition of this term, please see below).

Because gifts within this limit don’t trigger gift tax obligations, recipients typically do not need to report them on their federal taxes.

What is gift splitting?

Gift splitting allows married couples to maximize their annual gift tax exclusion. It can be a powerful tool for wealth transfer and, if you’re filing jointly, it may favorably impact taxes.

Each spouse can contribute the same maximum amount in the form of a gift, doubling the annual exclusion amount. In other words, each spouse can gift up to $18,000 to the same recipient for a combined, maximum tax-free gift total of $36,000.

Insight: Planning to make a large gift annually to several family members? With the right strategy, you may sensibly reduce your overall net worth, which can have a favorable impact on your own taxes.

What is the annual gift and estate tax exclusion?

Another component of the U.S. tax code closely related to the gift tax exclusion is the annual gift and estate tax exclusion. This exclusion applies to individual contributions with a value above the $18,000 annual exclusion.

This exclusion substantially increased with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. For 2024, the exclusion amount is $13.61 million per individual or $27.22 million for married couples if they combine their exclusions.

Insight: It’s important to note that taxes may be owed if the sum of the non-excluded gifts plus their estate exceeds the tax exclusion. And the TCJA provisions related to the exemption are temporary — the exemption is scheduled to expire at the end of 2025. So, if this is an exemption you plan to seek soon, a conversation with an accountant or tax attorney may be warranted.

How do you disclose gifts that exceed the annual exclusion?

Properly managing your gift reporting obligations ensures compliance with tax laws — and helps you track your remaining lifetime exemption.

You must file a gift tax return² when your individual gift exceeds the annual exclusion limit. Specifically, United States Gift (and Generation-Skipping Transfer) Tax Return (IRS Form 709)³ is required.

Remember: Failing to report gifts exceeding the exclusion can result in penalties and interest.

Per the IRS, you will owe interest on any tax not paid by the original due date of your gift tax return (generally the same due date as your individual tax return).⁴ The interest runs until you pay the tax. And the late payment penalty is usually 1/2 of 1% of any tax not paid by the regular due date. It is charged for each month or part of a month the tax is unpaid with the maximum penalty being 25%.

Insight: While you may not immediately pay gift tax on the excess amount, it may reduce your remaining lifetime gift and estate tax exemption.

Are any annual gifts excluded from taxation?

Gifts that fall within the annual gift tax exclusion are generally deemed tax-free. These gifts can include cash, property or other assets you provide to your loved ones.

Additionally, certain types of gifts are typically exempt from the gift tax,⁵ including:

• Gifts to spouses who are U.S. citizens: You can generally provide unlimited gifts to your U.S. citizen spouse without paying gift tax.
• Gifts to dependents: Gifts to dependents (such as your children) are typically exempt from gift tax — although sizeable asset transfers can trigger other legal complications that should be considered carefully before taking such action.
• Charitable donations: Donations to qualified charitable organizations are tax-deductible and do not count toward your annual or lifetime gift tax limits.
• Political donations: Contributions to political organizations are generally not subject to gift tax.
• Funds paid for tuition or medical expenses: You can make direct payments to educational institutions for tuition only or medical providers for health care expenses on behalf of someone else without incurring gift tax liabilities.

Note: the checks or payments must be made directly to the institution.

What is the current lifetime gift tax exclusion — and how will it change in 2026?

Again, for 2024, the lifetime gift tax exclusion is $13.61 million per person. This limit generally represents the total assets you can transfer during your lifetime without incurring a federal gift tax.

However, the TCJA’s temporary provisions are set to expire after 2025. Without new federal legislation to make these changes permanent, the exclusion could be greatly reduced as early as 2026.

The takeaway

With a firmer grasp now of the concepts explored in this article, you may be better prepared to make more informed decisions about how to transfer assets to your chosen heirs within your lifetime — and beyond. You may also possibly ease your tax burden in the short run.

It’s important to keep in mind that the potential changes in the lifetime gift tax limit can have profound implications for your estate beneficiaries. A higher limit allows for more tax-free wealth transfer, potentially reducing estate tax liabilities. In contrast, a lower limit could result in a more substantial portion of your estate being subject to estate tax, reducing the assets your beneficiaries inherit.

Curious to learn more about how to thoughtfully transfer sizeable assets? RBFCU Wealth Management, The Garner Davis Group can help you make more informed decisions that can help safeguard your wealth, reduce your tax liabilities and pass on your assets to your chosen heirs. Plus, our approach to wealth management integrates well into existing professional relationships you enjoy with your lawyer, tax attorney, trust officer or accountant.

Contact us today to learn more.

979-417-0563 | rbfcu.org/wealthmanagement

Information in this article is general in nature and for your consideration, not as financial advice. Please contact your own financial professionals regarding your specific needs before taking any action based upon this information.

This article was last updated December 2023.

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This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the primary basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.

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SOURCES

The following sources were last accessed in December 2023.

^{1, 5}“Frequently Asked Questions on Gift Taxes.” Irs.gov, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.

²“Filing Estate and Gift Tax Returns.” Irs.gov, https://www.irs.gov/businesses/small-businesses-self-employed/filing-estate-and-gift-tax-returns.

³“Department of the Treasury Internal Revenue Service United States Gift (and Generation-Skipping Transfer) Tax Return.” Irs.gov, https://www.irs.gov/pub/irs-pdf/f709.pdf.

⁴“Instructions for Form 709 (2022).” Irs.gov, https://www.irs.gov/instructions/i709.