High-Net-Worth Estate Planning: The Power of Strategic Lifetime Gifting

An estate tax is a tax on the privilege of transferring large amounts of wealth, including cash, investments, and properties, to your heirs upon death. It is levied on the estate of a deceased person if the estate’s value exceeds a certain threshold. In 2023, the federal estate tax applies to estates worth more than $12.92 million, but the current estate tax exemption is expected to sunset at the end of 2025, dropping the exemption to $7 million per person. Estate tax is marginal, meaning that only the amount that exceeds the threshold will be taxed, and the tax rate increases incrementally based on the difference between the threshold and the estate’s value. In 2023, the federal estate tax rate peaked at 40% for estates valued at more than $13.92 million. Additional state-specific estate or inheritance taxes may also be applicable, depending on the state in which you live. Therefore, estate planning strategies for high-net-worth individuals, especially those with an estate valued at $13 million or more, often focus on preserving wealth and reducing the effects of these taxes.

One way to mitigate estate taxes is by strategically lowering the value of your estate to get it closer to or just under the exemption threshold before you die. Gradually gifting assets to your intended beneficiaries during your lifeteime can accomplish this goal. Gift tax rates apply when you exceed the exempted yearly limit ($17,000 per gift recipient in 2023), but staggering tax-exempted gifts across multiple beneficiaries over several years allows high-net-worth individuals to provide for their loved ones and create generational wealth while limiting their estate’s overall tax liability.

Benefits of Lifetime Gifting

Gift recipients do not pay income taxes on what they receive, so gradually gifting money or assets to your intended beneficiaries can be a viable strategy with a relatively low level of legal complexity and required paperwork. You can use this strategy in conjunction with other estate planning strategies, such as establishing a trust, to create a well-rounded plan for the distribution of your estate when you pass away. Many high-net-worth individuals have found strategically accelerated inheritance gifting to be a tax-efficient and fulfilling use of their money as they age.

Estate Tax Reduction

One of the most evident pros of the gifting strategy is the benefit of reducing your taxable estate while still achieving the ultimate goal of transferring wealth to your beneficiaries. This is especially helpful for people whose estates are close to the tax exemption threshold and may only need to be reduced by a relatively small amount to avoid estate taxes altogether.

Shared Joy

Gifting generously while you are alive also allows you to enjoy seeing how the money is used and how it can bring blessings to your loved ones. This active participation is no longer possible once your loved ones receive their inheritance after you have passed away. Giving generously to contribute to important milestones, such as funding a grandchild’s college tuition, helping a child with the downpayment for their first home, or paying for part of a loved one’s wedding, can create invaluable memories that your loved ones will treasure after you pass away and that may be worth more to them than any inheritance.

Teaching Moments

Moreover, lifetime gifting can provide opportunities for you to discuss money with your beneficiaries and pass on your financial knowledge and values. Gradually transferring wealth over many years can help your loved ones who have not yet accumulated their own wealth get more comfortable with managing large amounts of money while you are still around to offer guidance on how they can save, spend, and invest wisely.

Drawbacks and Risks Associated with Lifetime Gifting

Despite the many benefits, it’s essential to be realistic about the inherent risks in gifting, especially when dealing with large sums of money. Knowledge of these drawbacks will help you make prudent decisions regarding the ways in which gifting may or may not fit into your overall financial plan.

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Loss of Control over Gifted Assets

For a gift to be recognized as such for tax purposes, the transfer of assets needs to be complete and irrevocable. Essentially, this means that the gift must truly be a gift; the giver no longer has ownership or control over how the gift is used. You can offer guidance or an opinion, but the money or assets no longer belong to you. The recipient can use the gift as they see fit, even in ways with which you disagree.

Gift Tax Consequences

Though gifting up to the yearly exemption threshold avoids gift tax, exceeding this limit will result in gift tax liabilities. Keeping track of the changing laws regarding gift tax rates is vital to ensure you maximize opportunities for generosity while avoiding unintended consequences.

Family Conflicts

Gifting also has the potential to cause conflict or misunderstandings, especially if there is unequal distribution among heirs or if someone feels excluded. Conflicts can also arise if the giver or other family members do not approve of the way a gift recipient uses the gift. These concerns will be present in any estate plan, but gradually gifting to heirs during your lifetime can make the matter more immediately pressing. To mitigate this, it’s critical to be thoughtful and communicate expectations clearly when making lifetime gifting a part of your estate plan.

Conclusion

High-net-worth estate planning tends to be incredibly complex, and most high-net-worth individuals would benefit from working with an experienced estate planner familiar with the estate and inheritance laws specific to their state. The financial advisors at Business & Financial Strategies have a wealth of experience helping their clients create dynamic and tax-efficient estate plans as part of their comprehensive suite of financial services. They can offer advice on effective strategies for reducing the impact of estate and inheritance taxes and guide high-net-worth individuals in creating a legacy of generational wealth. Business & Financial Strategies has offices in the Iowa City/Coralville area and in Fairfield, Iowa, and it serves clients throughout the United States. To learn more, call 319-358-7700 or visit www.BFSFinancialPlanning.com to schedule a complimentary twenty- to thirty-minute in-person or virtual initial conversation.