How to Plan for Estate and Gift Taxes

Federal estate tax in 2023 mostly remains an issue for the very wealthy — those with an estate valued at more than $12.92 million or $25.84 million for a married couple. Even with the generous exclusion, some estates may be subject to tax, i.e., you may be on the hook for state estate taxes. The tax threshold in Oregon and Massachusetts, for example, is only $1 million. Thankfully, here in Colorado, we do not currently have a local estate tax, so we only need to be mindful of the federal estate tax values. Keep in mind, however, that only a small percentage of taxpayers are subject to the estate tax.

Lifetime Gifting

The current tax rates are scheduled to sunset at the end of 2025, when they’re expected to revert to 2017 levels, adjusted for inflation. With this in mind, you may contemplate the option of lifetime gifting.

Giving away assets before your death reduces the size of your estate’s tax burden, as long as you are careful about the federal gift tax rules. In 2023, you can gift up to $17,000 each to an unlimited number of people without triggering any taxes. You can make direct gifts — for tuition or medical expenses, to your spouse, to a political organization for its use, and to qualifying charities — without being taxed. Certain kinds of trusts may also provide a workaround.

Unified Tax System

The estate and gift taxes work hand in hand. Without the gift tax, individuals could give away all their assets during their lifetime and avoid any taxation. Without the estate tax, people could give away all their assets at death without any taxation. Estate and gift taxes are joined into what is sometimes referred to as the federal unified transfer tax system:

Both use the same tax rate schedule.
Computation of both is cumulative over one’s lifetime. A gift tax credit used in one year reduces the amount of gift tax credit that can be used in future years. The total gift tax credit used during one’s lifetime reduces the credit available to use against estate taxes.
Both have marital and charitable deductions to reduce tax liability.
The tax rate above the estate tax/gift tax exclusion ranges from 18% to 40%.

How the Taxes Work

An estate tax calculation starts with your gross estate. The basic principle for valuing property is generally its fair market value — what it’s worth at the time of your death. Taking inventory of your major assets will include anything you own with documentation, like a deed or title papers, cash assets as financial and investment accounts, and income-generating assets like a business, rental properties or intellectual property.

It’s a nice thing to be able to give someone you love a gift, especially if that gift can help ensure their security, well-being and even happiness. Often, parents and grandparents are concerned that leaving their children a lot of money will ruin them. Annual gifts are a good way to determine whether that’s true and help the subsequent generations get used to handling wealth. Lifetime gifts can eliminate sudden-wealth syndrome.

Planning out your estate can be difficult if you’re not a professional, so you may want to consider working with an accountant and estate planning attorney to make sure you’ve taken the right things into consideration.