On December 22, 2017, Congress passed the Tax Cuts and Jobs Act of 2017 (the “Act”), which allowed for an increase in lifetime gift tax exemption amount (“lifetime exemption amount”).  In 2024, the lifetime exemption amount increased to $13,610,000. However, this increased lifetime exemption amount will revert back to $5,000,000 indexed for inflation on January 1, 2026. 

How Can I Take Advantage of This High Exemption Amount?

It is simple – make gifts. You can give to your spouse, children, grandchildren, or even more distant relatives. The most effective use of this exemption amount is to use planning techniques which help reduce your taxable estate and leverage the exemption amount.

What Kind of Planning Techniques Can I Use?

Below are eight types of gifts to help take advantage of the increased lifetime exemption:

1. Annual Exclusion Gifts: As of 2024, you can gift up to $18,000 ($36,000 for a married couple) per person, per year, without having to file a gift tax return. This means you can give away up to $18,000 to as many people as you want each year without reducing your lifetime exemption amount.
2. Qualified Personal Residence Trust (“QPRT”): If you own a home and/or a vacation property (a “residence”), a QPRT allows you to transfer a residence to a QPRT at a discounted value while retaining the right to live in the residence for a set number of years.  After the term ends, the residence passes to your designated beneficiaries. The gift to the QPRT reports only the future interest in the residence allowing you to gift the residence for less than fair market value. The amount of the discount can increase if you retain a longer right to live in the property.
3. Intrafamily Loans and Forgiveness: Many families loan money to kids at a rate lower than a commercial lender and then choose to forgive interest payments or principal amount in the future. It is a great way to lend kids money at a lower rate.
4. Irrevocable Life Insurance Trust (“ILIT”): If you own life insurance policies, the death benefit will be included in your taxable estate. You can transfer these policies to an ILIT to remove the death benefit from your taxable estate and providing liquidity to potentially pay estate taxes.
5. Intentional Defective Grantor Trust (“IDGT”): An IDGT allows you to transfer assets likely to appreciate in value, such as securities or business interests, out of your estate while continuing to pay income tax on them. This technique reduces the size of your taxable estate while allowing you to continue paying income tax on these assets, which allows the assets to grow at a greater rate outside of your estate.
6. Charitable Remainder Trusts (“CRT”): A CRT enables you to give assets to a trust while retaining an income stream for a set term or your lifetime. At the end of the term, the remaining assets go to a charity. CRTs provide a tax-efficient way to make charitable gifts while receiving income.
7. Grantor Retained Annuity Trust (“GRAT”): A GRAT allows you to transfer assets to a trust while receiving annuity payments for a fixed period. If the assets appreciate more than the IRS’s Section 7520 rate (the “hurdle rate”), the excess over the hurdle rate can pass to beneficiaries free of gift and estate taxes. Learn more in our article, What’s So Great about GRATS?
8. Charitable Gifts: You may make charitable gifts to organizations and reduce your taxable estate without having to use your lifetime exemption amount.

When to Report Gifts

Not all gifts need to be reported on a gift tax return. If a gift exceeds the annual exclusion amount ($18,000 for 2024) it must be reported. Clients may decide to file gift tax returns to initiate the statute of limitations on certain transfers or to allocate Generation Skipping Transfer Tax exemption to dynasty trusts intended to benefit future generations.

Conclusion

There are many strategies available to make gifts which benefit your recipients while reducing your taxable estate. If you are interested in learning more about these or other estate planning strategies, please contact any of the attorneys in the Private Client Services practice at Wilchins Cosentino & Novins LLP. We welcome the opportunity to assist you with estate and tax planning strategies and encourage you to take action in advance of the scheduled reduction in lifetime gift tax exemptions.

Learn more about the Scheduled Reduction in Lifetime Gift Tax Exemptions.

Taylor Ferrara is a Trust and Estate attorney in the Private Client Services Practice. Learn more about Taylor here.