Individuals planning their estate are likely to have questions regarding their tax implications. For most people, it is important to pass on as much as possible to their heirs while limiting tax liability where they can.
Using gifts to reduce estate tax liability is a common estate planning strategy to help people achieve this goal.
How can gifts help reduce taxes?
The right for someone to transfer assets to others upon their death comes with a price tag: estate taxes, which are also known as death taxes. The administrator of the estate must pay these from the estate account prior to distributing funds amongst heirs.
According to the Illinois State Barr Association website, a resident of Illinois who owns property in the state may be subject to some or all of the following taxes:
- Illinois Estate Tax
- Income tax
- Federal Estate and Gift Tax
Gifting money to friends and family while still alive will decrease the overall value of someone’s estate, thus decreasing the amount of taxes their estate will be responsible for in the future.
Can gifts prevent all taxes?
If gifts can help reduce or avoid tax penalties, can someone give enough of their assets as gifts to avoid taxation at all? The shorts answer is that it depends.
Forbes reported earlier this year that a married couple is exempt from gift and estate taxes for assets totaling up to $23.4 million in 2021. If a married couple has assets totaling more than that, they may want to distribute gifts to reduce the tax liability. However, there is a maximum amount that anyone can gift to another person before the gift is taxable itself. Going into 2021, that amount is $15,000.
In general, qualifying for high exemptions in conjunction with gifting assets may very well lead to near-zero tax liability.