You pay many different types of taxes throughout your life, including income taxes, property taxes, capital gains taxes, sales tax, gas and hospitality taxes, and on and on. Since you are taxed at every turn while you are living, you would hope that the IRS will leave your estate alone.
Unfortunately, if you have been very successful, your estate can be subject to taxation because there is a federal estate tax. Here in Connecticut, we have a state-level estate tax to add to the potential legacy erosion.
When you think about death taxes, you would naturally consider lifetime gift giving. Can you give gifts while you are living to get around the estate tax? We will answer that question in this post.
Federal Gift Tax
The estate tax was enacted in 1916, and there was no gift tax at that time. People that were going to be exposed would give gifts while they were still living to sidestep the tax.
Pro tax legislators took notice, and they pushed through a gift tax in 1924 to close the loophole. The other side managed to repeal the gift tax in 1926, and the window of opportunity remained open for the next six years.
In 1932, the gift tax was reenacted, and there has been a gift tax in place since then. The gift tax and the estate tax were unified during the 1970s.
There is a gift/estate tax exclusion that gives you the ability to transfer a certain amount tax-free before the transfer taxes would be applicable on the remainder. These taxes are only a factor for high-net-worth individuals because the exclusion is $12.06 million in 2022.
This $12.06 million level is the highest it has ever been, and it came about because of a provision in the Tax Cuts and Jobs Act of 2017. The provision is going to sunset at the end of 2025, and the exclusion will go down to $5.49 million indexed for inflation on January 1, 2026.
Because there is a pending reduction, you should certainly consider gift giving over the next few years. Direct gifting is a possibility, and you could alternately fund a trust. We can gain an understanding of your situation and make the appropriate recommendations.
Additional Federal Gift Tax Exclusions
In addition to the unified gift and estate tax exclusion, there is a $16,000 a year per person exclusion. You can give unlimited tax-free gifts in a calendar year without using any of your unified exclusion as long as you do not give more than $16,000 to any one person.
A married couple could combine their annual exclusions to give up to $32,000 to an unlimited number of people every year. If you do this on a consistent basis, you can transfer significant assets out of your name in a tax-free manner.
The other exclusions are the educational and medical exclusions. If you want to pay tuition or health care bills for others, you will not incur any gift tax exposure, but you have to pay the institution or the health care provider directly.
Connecticut Gift Tax
There are a total of 12 states in the union that have state-level estate taxes, and there is an estate tax in the District of Columbia. Only one of these states has a gift tax, and unfortunately, Connecticut is that state.
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If taxation is going to be a factor when your estate is being administered, we can help you implement an estate tax efficiency strategy. And of course, if you are like most people with no estate tax exposure, legal counsel can be just as invaluable.
Each situation is unique, and there is no one-size-fits-all approach that is right for everyone. When you work with us, we will provide personalized attention, and your estate plan will be tailor-made to suit your needs.
You can set the wheels in motion if you call our Glastonbury, CT estate planning office at 860-548-1000, and you can use our contact form to send us a message.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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