Taxation of Gifts & Estates is often misunderstood, with many misconceptions floating out there. Here’s some important facts concerning (2023) Federal Gift & Estate Tax laws.
Estate Taxes Only Apply to Property Transfers at Death that Exceed Exemption Limits
In 2023 individuals can pass $12.92 Million upon death to beneficiaries with no Federal Estate Tax. Married couples can pass on double at $25.84 Million. These limits will be reduced by 50% Jan 1, 2026, unless Congress passes a different law. For larger Estates the federal tax rate is a sliding scale maxing out at 40% on assets above the limit.
For simplicity, assume the exemption is $13 Million and the tax rate is a flat 40%.
Federal Taxes are Paid by the Estate / Giver, Not the Beneficiary / Receiver
Example: If Bill, unmarried, dies with an Estate valued at $15 Million, Estate taxes are paid on the $2 million above the exemption. The Estate pays $800,000 (40% x $2 Million) in Estate taxes and the remaining $14.2 Million can be distributed to beneficiaries free of federal tax. Beneficiaries are not taxed on their inheritance in Arizona (Only NE, IA, KY, MD, NE, NJ, PA have inheritance tax).
Making Large Gifts Now Reduces Exemptions at Death
Large gifts, over $17,000 to one person in a year, must be reported to the IRS. Reported gifts are deducted from your Lifetime Gift & Estate Exemption.
Example: Bill gives $1 Million to his daughter today and dies 3 months later with a $15 Million Estate. Bill’s Estate exemption is reduced by the $1 Million gift, leaving only $12 Million to transfer tax-free to beneficiaries. Bill transferred a total of $16 Million ($1 Million in life and $15 Million at death), which exceeded his lifetime Gift and Estate Exemption by $3 Million, which is subject to a 40% Estate tax. His Estate will therefore pay $1.2 Million in tax. Bill’s sole heir, his daughter, does not pay federal taxes on her inheritance.
Example: Bill gives $15 Million to his friend “Lucky” this year. Bill reports a $15 Million gift to the IRS and pays gift taxes based on the $2 Million above his lifetime exemption, which amounted to $800K for Uncle Sam. When Bill dies, his Estate pays 40% Estate tax on ALL ASSETS because his entire exemption
was used up during his lifetime.
Reportable vs Taxable Federal Gifts
Do not confuse “reportable gift” with “taxable gift”. All gifts exceeding $17K per person per year are reportable, but not taxable until you have exceeded your lifetime exemption. Gifts up to $17K per person per year are not reported to the IRS and therefore do not reduce your lifetime exemption.
Example: “Bill & Linda” have $40 Million and want to minimize Estate taxes by maximizing non-reportable gifts each year. They have 5 sons, all married, and 20 grandchildren, totaling 30 people that will get annual gifts from both Bill & Linda. They can gift $1.02 Million each year ($17K x 30 from Bill, and the same from Linda). If gifts are made for 20 years, Bill & Linda reduce their Estate by $20.4 Million, saving almost $8.2 Million in Estate / Gift taxes.
Obviously there are many other tax strategies available such as charitable giving and charitable trusts, but hopefully by having a better understanding Gift and Estate taxes you can….
Leave a Legacy! Not a Burden.