The Tax Cuts and Jobs Act (TCJA) significantly increased the estate exclusion amount (presently $12.92 million for 2023). Under present federal legislation this limit is set to decrease to $5.0 million (adjusted for inflation) in 2026. With the increased gift and estate tax exemption amounts set to decrease in 2026, you may find yourself with the desire to reduce the size of your estate. There are three simple ways to reduce your estate that do not require an estate attorney.
Annual Gift Tax Exclusion
For 2023, the annual gift exclusion amount is $17,000 per donee, up from $16,000 in 2022. This means a donor can gift this amount to as many people as they want in 2023 without using any of their gift and estate tax exemption amounts or paying a gift tax. Married couples who elect to gift-split can give a combined $34,000 per donee without using any of their gift and estate tax exemption amounts or paying a gift tax. These gifts can go a long way in reducing the size of an estate and producing significant estate tax savings.
The illustration below outlines how a married couple with children and grandchildren can transfer $328,000 tax free to reduce the size of their total estate.
Tuition Payments Made Directly To An Educational Institution
Tuition payments made directly to a college do not count as gifts for gift tax purposes. This allows parents, grandparents, and other individuals to reduce their taxable estate by helping to cover the cost of college for a child. Additionally, these direct payments do not count toward annual gift tax exclusion amount. One drawback for making direct tuition payments is the potential impact on financial aid. Typically, a tuition payment made directly a college will reduce a student’s eligibility for needs based financial aid.
Payments Made Directly To A Healthcare Provider
Payments made directly to a medical institution or care provider for the benefit of an individual do not count as gifts for gift tax purposes. This allows for parents, grandparents or other individuals to reduce their taxable estate by covering medical expenses for loved ones or other individuals. Additionally, these direct payments do not count toward the annual gift tax exclusion amount. The expenses that qualify are the same as those that are deductible for income tax purposes.
Over the past year, we have all felt the effects of inflation, mostly in a negative way. However, the federal estate exemption saw a significant increase year over year thanks in large part to inflation. This allows for additional gifting opportunities for those who may have already exhausted their lifetime amounts. The chart below highlights the annual changes to many of the federal estate planning limits.
Estate planning is very specific to each individual or family and their unique situation and desires. There is no one size fits all approach. Different estates will require different documents and vehicles to best distribute assets in accordance with the wishes of the deceased. The “Guide to Estate Planning” below will give you a brief highlight and help you familiarize yourself with many of the components of an estate plan.
Estate planning can alleviate stress for you and your loved ones by helping to protect your legacy in the manner you desire, provide for your dependents and heirs, replace uncertainty with confidence and allow your loved ones to focus on grieving and healing.
If you have any questions that pertain to your specific situation, please do not hesitate to your advisor.
Sources: JDSURPA, Saving for College, The Balance
