As we reach the end of 2024, many of us are contemplating holiday gifts for family, friends, and charities. While doing so, it is wise to consider making use of the yearly exclusion for estate tax purposes as well. Also referred to as the annual “gift tax exclusion,” the yearly exclusion allows you to make gifts valued at up to $18,000 (as of 2024) each year to as many recipients as you wish without triggering federal gift taxes or using any of your lifetime estate and gift tax exemption. The Los Angeles attorneys at Schomer Estate & Wealth Advisors urge you to maximize your yearly exclusion before the end of the year.
Understanding the Yearly Exclusion
The Internal Revenue Service (IRS) allows individuals to gift up to the annual exclusion limit each year to an unlimited number of recipients without needing to report the gift or pay any gift tax. This gift does not count toward your lifetime estate and gift tax exemption, which is set at $13.61 million per person for 2024. By utilizing the annual exclusion limit, you can effectively reduce the size of your taxable estate over time, thus lowering potential estate taxes for your heirs upon your death.
Make Use of the Exclusion Before Year-End
One of the most important steps to maximizing the annual exclusion is to act before the end of the calendar year. The exclusion resets every January 1, meaning you cannot “carry over” unused portions from prior years. For example, if you do not use your full $18,000 exclusion per recipient by December 31, the opportunity is lost for that year. By making these gifts before year-end, you maximize the tax-free transfers you can make to family, friends, or other beneficiaries in the current tax year.
Making Gifts to Multiple Recipients
The annual exclusion is available for each recipient you choose, without limit. For example, if you have three children, you could gift each of them $18,000, for a total of $54,000, without incurring any gift tax. If you are married, you and your spouse can gift a total of $36,000 per recipient, which means a couple could transfer up to $108,000 tax-free to three children in one year. Moreover, gifts made to charities and entities, such as a trust, can also qualify for the gift tax exclusion. This flexibility allows you to make substantial tax-free gifts that cumulatively reduce your estate over time.
Gift Assets as Well as Cash
Although cash is the most straightforward option, you may also gift assets such as stocks, bonds, or other property up to the $18,000 annual limit per recipient. Gifting appreciated assets can be particularly beneficial because it transfers not only the asset’s current value but also any future appreciation out of your estate. Be aware, however, that when you gift appreciated assets, the recipient inherits your cost basis, meaning they may owe capital gains tax if they sell the asset. Gifting assets can still be an effective strategy if you are planning for recipients to hold onto the assets rather than sell them immediately.
Consider 529 Plan Contributions
Contributions to a 529 college savings plan can also be an effective way to use your annual exclusion. Not only do 529 plan contributions grow tax-free if used for qualified educational expenses, but you can also “front-load” a 529 plan with five years’ worth of contributions and count them toward the annual exclusion. In 2024, that means you could contribute up to $90,000 to a 529 plan (or $180,000 for married couples) in one year and treat the amount as if it were made over five years for gift tax purposes. This strategy allows you to make a large contribution upfront, maximizing the potential for tax-free growth in the account.
Can We Help You Maximize Your Yearly Exclusion?
For more information, please join us for an upcoming FREE seminar. If you need assistance making use of the yearly exclusion before the end of the year, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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