Those who achieve economic success often hope to pass their good fortune to others when they die. Estate plans allow individuals to choose specific beneficiaries to receive their assets, including family members and charitable organizations. Maximizing what someone leaves for their intended beneficiaries usually requires that they minimize certain liabilities, like estate taxes.
Strategic gifts are often part of a broader estate planning effort. A testator who worries about the state tax liability might plan to diminish their assets a little each year by making planned gifts for their family members or other beneficiaries. Often, people gift the maximum amount allowed without triggering gift taxes.
As of 2024, individuals can gift another person up to $18,000 in cash or resources annually without needing to pay a federal gift tax. Spread across multiple different beneficiaries, that amount could help diminish the value of an estate and bring it down below the threshold for estate taxes. However, gifts can actually factor into the value of an estate for the purposes of federal taxes. Testators need to be aware of how gifts affect estate tax liability to better protect themselves and their beneficiaries.
Prior gifts become part of the estate
An individual cannot simply make a few sizable gifts before their death to avoid probate court and estate tax obligations. There are rules in place to avoid obvious attempts at sidestepping tax liabilities. Gifts can actually contribute to the full value of an estate.
An individual’s personal representative managing their estate does not need to account for a lifetime of gifts to others. However, the process of calculating the value of the estate to determine if paying estate taxes is necessary includes calculating the gifts made to others within the last three years. Therefore, strategic gifting is most effective when it begins as early as possible and when the annual amounts gifted aren’t enough to push the remainder of the estate over the federal estate tax exemption threshold.
Currently, an estate must be worth more than $13.61 million for federal and Connecticut estate taxes to apply. Those with personal property at or close to that value may want to plan carefully to minimize estate tax liability and maximize what they’re chosen beneficiaries receive from their estates.