Retirement Strategies & Your Legacy Plan With Prop 19

On November 3, 2020 California voters approved Proposition 19 (Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act) to change the state constitution, which makes major changes to a property owner’s ability to transfer their Proposition 13 assessed value property. The measure generally expands a qualifying homeowners ability to transfer the assessed value and tax base price of their home while simultaneously narrowing the property tax benefits provided to inheritors of commercial and residential properties- including children and grandchildren. These significant property tax changes went into effect on February 16, 2021.

We would like to draw your attention to the opportunities available with the portability of your assessed value and tax base should you be considering relocation or downsizing within California.

THE EXISTING LAW: PROPOSITION 13

Passed by voters in 1978, Proposition 13 (“Prop. 13”) taxes California properties based on their assessed value (also known as the base year value or taxable value) rather than their fair market value. Assessed value is generally determined by including the purchase price and cost of improvements, plus an increase of no more than 2% per year unless and until there is a change in ownership.

On average, California real estate has appreciated in value at a rate higher than 2% per year, so the longer a property is held, the greater the difference is between its assessed value and its fair market value. This equates to a greater difference in the taxes paid on said property versus what they could be potentially. 

Proposition 13 will remain the current law even after Proposition 19 goes into effect. The impact will be to these the exceptions called the “parent-child exclusion” (“Prop 58”) and “grandparent-grandchild exclusion” (“Prop 193”) and the significant tax benefits they provided.

NOTABLE CHANGES: CA PROP 19

The two main takeaways we’d like to highlight for our California clients are (1) the benefit for homeowners who are age 55 or older being able to transfer the assessed value of their primary residence and (2) the changes to property transfers between parents and children (and grandparents and grandchildren).

#1 TRANSFER OF ASSESSED VALUE

  • What this means: Homeowners aged 55 or older have the possibility of replacing their primary residence (relocation within California, downsizing; extended also to those needing home replacement after a natural disaster) and transferring the tax basis from their current primary residence to the new home. The value limit for the new property is the sum of the factored base year (or assessed) value plus $1 million.
  • The takeaway: Review your retirement plans. If you’ve been considering a change for your Retirement Life By Design this could present a interesting tax opportunity for you.

#2 GENERATIONAL TRANSFERS

If a property is sold or transferred, the property taxes can sometimes increase dramatically as a result. Proposition 19 changes the previously established generational exclusions. However, under limited circumstances, the sale or transfer of property to children/grandchildren will not be reassessed if certain conditions are met and properly submitted.

  • What this means: The ability to transfer a primary residence between parents/grandparents and a child/grandchild without reassessment will no longer apply unless two conditions are met: the parent’s/grandparent’s primary residence becomes the child’s/grandchild’s primary residence within one year AND the fair market value of that same property does not exceed the assessed value by more than $1 million. In those situations where the fair market value is $1 million more than the current assessed value, then the new assessed value will be the fair market value less $1 million. This means any property that is not the primary residence will be reassessed upon sale or transfer to anyone.
  • The takeaway: Review your legacy plan. If you are planning on leaving/transferring property to a child/grandchild, be certain that they are aware of the conditions of tax basis. This could create problems if you have property you wish to sell, gift, or bequest in your will or trust such vacation homes, second homes, rental properties, and/or commercial properties.

Prop 19 provides interesting opportunities for California residents. It also creates potential complications to legacy plans you may currently hold. The team at Life By Design Investment Advisory Services is ready to assist you in navigating changes or opportunities this legislation creates for your retirement and/or legacy plans. Schedule your telephone appointment to discuss solutions and opportunities for your individual circumstances.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Leave Nothing Unsaid

The goal of legacy planning is to ensure your plan is carried on through the next generation reflecting your passions and purpose for an everlasting impact. Your legacy is not exclusively material or financial. A family love letter is the gift you give to the people you love the most, when they need you the most. Have you written yours? For many, this task seems insurmountable- “I love that idea, but I have no idea where to begin” or “That seems really difficult”. We have fantastic resources to help you put pen to paper and say what really needs to be said.

WRITING YOUR FAMILY LOVE LETTER

The gift of time, love and clarity. Your family love letter is the key to
 some unanswered questions your loved ones may have. It’s your last message to them along with some of your most important information- assets you hold and access, benefits you’re entitled to, your financial & philanthropic preferences, and important contact information.

Come into the office at your convenience to drop off a digital, written and/or video copy that we will hold safe to hand over to your loved ones at the appropriate time.

Convey your wishes and your most valuable information to your family in this love letter. Equipping your family with this essential letter will help to ease their consternation at a time they need it the most. Schedule your appointment today and discuss your concerns with writing this lasting legacy letter.

LEAVE NOTHING UNSAID

This booklet Leave Nothing Unsaid helps remove the fear and mystery behind leaving a meaningful letter to a loved one with an easy, step-by-step process. Writing prompts and questions, word lists and creative ideas turn the letter writing into a fully immersive experience to focus on the things you love most about your loved ones.

CLICK TO DOWNLOAD

ESTATE & LEGACY PLANNING

Consider scheduling a “Family Legacy Planning Meeting” with Life By Design Investment Advisory Services where we offer a warm and friendly environment, a meeting well planned in advance with your unique family needs in mind and our signature preparedness kit. Communicate your wishes, protect your family and reduce your taxes- these are the areas we’ll dive into as we assist you in the preparation of your legacy.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

4 Steps to Take When You Inherit an IRA

As the population in the U.S. grows older, it is becoming increasingly common for individuals to inherit retirement accounts from their family members or dear ones. However, it’s important that as an heir to such accounts you follow particular steps in order to avoid making mistakes that could cost you.

There are several options to handling inherited accounts, which depend on a variety of factors including your relationship to the original account holder, the age of the original account holder when they passed away and the type of account you’ve inherited. Here are four crucial steps to follow to increase your benefits in the long run:

STEP 1: TITLE THE NEW IRA

Once you inherit an IRA, you’ll want to make sure it’s set up correctly. An inherited IRA should have the name of the deceased original owner and it should also indicate that the IRA was inherited. Alternatively, if the deceased was a spouse you have the option to roll over the amount of the inherited IRA into your account. Keep in mind that if you transfer any distributed money to a new account in your name, you must do so within 60 days.1

If you’ve inherited an IRA from someone other than a spouse, you will not be able to simply move money into your own retirement account. In order to keep the tax benefits of the inherited account, you will need to set up a new Inherited IRA for Benefit under your name.2 After the account has been created, you’ll be able to transfer assets from the original account to your beneficiary IRA.

STEP 2: CALCULATING THE RIGHT DISTRIBUTION AMOUNT

If you’re the spouse of the deceased, the prior year-end account value and life expectancy are needed to calculate the distribution amount on your inherited IRA. For this calculation, the value of the account from the last year is used. For example, in order to calculate distributions for the year 2024, the account value on December 31, 2023, is used.

If you are a non-spousal beneficiary, it’s important to note that you’ll be required to withdraw the entirety of the account within 10 years, if the deceased passed on or after January 1, 2020.3 (Prior to the SECURE Act passing, the IRA amount was allowed to be withdrawn throughout the beneficiary’s remaining life expectancy.)

STEP 3: DETERMINE IF THE IRA HAS AN AFTER-TAX BASIS

Many beneficiaries are unaware if the IRA they’ve inherited has an after-tax basis or not. If you have inherited an IRA and you find out that it has an after-tax contribution you should fill out a Form 8606.4 By completing this form you’ll be able to claim the non-deductible portion of the required minimum distribution.

You can always ask the executor if they are aware that the IRA has an after-tax contribution, but they might not know themselves and will need to refer to the tax returns of the deceased to learn if they filled out the form previously.

STEP 4: MAKE A PLAN FOR THE TAXATION OF DISTRIBUTIONS

Taxation of distribution is different for Roth IRAs and other IRAs. In many cases, Roth IRAs have distributions that are tax-free if the beneficiary is taking the minimum distributions. However, for other IRAs, the distributions are fully taxable unless the original IRA owner had a tax basis on their IRA. If the distribution is taxable, you can add the taxable portion of the distribution to the tax projection for the year to learn the amount of tax you should withhold.

As you make a plan for distribution, remember the SECURE Act’s change for non-spousal beneficiaries. You will be required to distribute the entirety of the account within 10 years of inheriting it. Exceptions to this rule include:

  • Disabled or chronically ill persons
  • Minors
  • Those who are less than 10 years younger than the deceased3

To avoid making costly errors, you should meet with your retirement wealth advisor as soon as you learn that you have inherited an IRA. Mistakes could mean larger taxes and complexities in the long run.

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  2. https://www.forbes.com/sites/davidrae/2019/09/19/inheriting-an-ira/#6993dff82b7f
  3. https://www.congress.gov/bill/116th-congress/house-bill/1994/text?q=%7B%22search%22%3A%5B%22h.r.+1994%22%5D%7D&r=1&s=2#toc-H084B5EBD76DF47C0B895121999E2270E
  4. https://www.investopedia.com/articles/retirement/04/030304.asp
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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

A Guide to Trusts for Estate Planning

A majority of Americans understand the importance of estate planning, yet an alarming percentage of adults do not have arrangements in place. According to a 2019 survey, 51% of people believe having an estate plan is necessary, but only 40% have actually implemented one.1 If you’re a part of the majority of Americans who have put off facing the future of your finances after death, it might be time to start weighing your options. Here is some helpful insight into what trusts are, who they benefit and why you may want to make them an integral part of your estate plan.

What are Trusts?

Trusts are legal documents you set in place to protect and control all of your assets. While some people may associate trusts with ultra-wealthy families, this stereotype is often untrue. Trusts are for anyone looking for an efficient way to control their assets after death or in the case of incapacitation. Additionally, trusts can help those caring for minors, children with special needs or pets make future arrangements for your dependents.

Types of Trusts

If you decide to incorporate a trust into your estate plan, the next decision to make is the type of trust(s) you wish to use. There are four main types of trusts, although these can be broken down further into smaller, more detailed trust types.

The main types of trusts include:

  • Revocable trusts
  • Irrevocable trusts
  • Living trusts
  • Will trusts

Just as they sound, revocable trusts can be altered and amended after creation, while irrevocable trusts can not. And while a living trust is established while the individual is still living, a will trust is created at or after death, based on the individual’s will.

Living Trusts in the State of California

In California, unless you have a Living Trust, your estate will go through Probate if…

  • You own any real estate valued at over $50,000.
  • Your investments, bank accounts, timeshares, real estate and personal property have a cumulative value over $150,000.

Probate is the State settling your estate with or without a Will, unless you have a Living Trust. The Probate process takes approximately one year prior to arrive at the release of your assets and moment that your beneficiaries receive their inheritance. Probate costs between 6-10% of the gross value of your estate including statutory fees set by the state. A Will is considered a letter to the probate court stating your wishes and will not avoid Probate Court. 

In the event that you become incapacitated, a Living Trust will allow the people you chose, not the court, to make your financial and health decisions.

Gift/Estate Tax Exemption for Trusts

The gift and estate tax exemption is the amount you can transfer during your life or at your death without incurring gift or estate tax. For 2024, the gift and estate tax exemption is $13.61 million ($27.22 million per married couple). Lifetime gifts that do not qualify for the annual exclusion described above will reduce the amount of gift and estate tax exemption available at death. Importantly, unless further legislation is enacted, the current gift and estate tax exemption amount will be reduced by approximately one-half at the end of 2025 ($5 million adjusted for inflation).

Top Three Benefits of Establishing Trusts

Benefit #1: Tax Efficiency

For some couples, establishing a revocable trust may help in minimizing estate tax burdens. Federal estate taxes will only be triggered if an individual’s accumulated assets equal $13.61 million or more, or a combined total of $27.22 million for couples, as of 2024. Couples with a high accumulation of wealth and assets may want with their legal and financial professionals to create trusts that help shelter the remaining spouse from estate tax burdens after the passing of their loved one.

In December 2019, the government passed the SECURE Act, which affected certain aspects of retirement savings, distributions, withdrawals and estate planning. Previously, non-spousal beneficiaries of the deceased’s IRA could stretch distributions out over the rest of their estimated lifespan. But with recent changes enacted, the account must be distributed over a 10-year span. Exceptions include those who are disabled or chronically ill, less than 10 years younger than the deceased or under the age of 18.

As far as tax efficiency, this shorter distribution period can mean a greater tax burden to your beneficiaries, with higher yearly withdrawals required to meet the 10-year requirement. If you previously made a trust the beneficiary of your IRA, you may want to revisit the terms of the trust with your wealth advisor to make sure it’s still relevant and effective with these recent changes. With certain types of trusts, this setup could potentially help non-spousal beneficiaries (such as children or grandchildren) bypass the 10-year rule, thus creating more tax-beneficial distributions.

Benefit #2: Avoid Probate

If your loved ones are left with only a will after your passing, the will must be sent through the state’s probate process. This means the contents of the will become public record, and your heirs may be delayed in receiving their inheritance. Additionally, probate can be an expensive and burdensome process to put on your beneficiaries. In establishing a trust, you can help your loved ones avoid the probate process. This can mean more privacy and less delay in fulfilling your final wishes.

Benefit #3: Protect Your Estate

What’s a more obvious reason why someone would want to set up a trust? To control what happens to their things after they die. Simply put, trusts can help protect your estate. When done right, a trust can determine who gets what and how things are cared for once you’re gone. Neglecting to provide instructions like these means your biggest assets could end up in the wrong hands. Instead, creating a trust allows you to pass along what you have to who you want, including your children, grandchildren and charitable organizations.

Disadvantages of Establishing Trusts

While there’s potential to greatly benefit from having trusts as a part of your estate plan, there are a few considerations to make before establishing a trust. Most of the advantages listed above are only effective if a trust has been established correctly. And these are often complex documents, especially when compared to the simplicity of a will.

any number of small errors could negate the benefits your beneficiaries were intended to receive. Because of this, it is recommended that you seek legal help if you decide to establish a trust. A professional can help you understand your options and work to maximize the benefits. This, however, means that establishing a trust can come with an upfront cost, as well as ongoing costs for maintenance, revisions and re-titling of assets.

Whether you’ve been trying to make estate planning a priority or it’s been at the bottom of your to-do list, you may want consider if establishing a trust could benefit you, your estate and your loved ones. When done right, you may be able to avoid costly and slow probate processes and protect your dependents in the event of an unexpected death.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

IRS Changes Inheritance Rules: Protecting Your Legacy

The IRS recently updated some rules about trusts that could make your heirs accidentally liable for capital gains taxes.1

It’s another quiet change that could severely impact families trying to maximize their legacies.

What Changed Under the New IRS Rules?

Under New IRS Rules, assets inside irrevocable trusts may not receive a step-up in basis unless those assets are included in the taxable estate upon death.

If your estate strategy includes an irrevocable grantor trust, you should work with an attorney and review your trust to avoid saddling heirs with unexpected tax bills.

Typically, assets inherited at death receive a step-up in cost basis to the current fair market value, which eliminates any capital gains achieved during the giver’s lifetime.

However, under the updated rules, any assets held in irrevocable grantor trusts (used by many to limit estate taxes and protect assets from judgments or creditors) will not receive that step-up in basis unless they are included in the taxable estate.1

Your loved ones could accidentally inherit a massive tax bill depending on how the trust is set up.

Why It’s Essential to Review Your Estate Plan

Changes like this make it critical to review your estate plan regularly.

This 2023 change is just one of many that are likely coming in the years ahead.

For example, current estate tax exemption amounts ($13.61 million per person and $27.22 million for a couple in 2024) will expire at the end of 2025.2

That means that if the government doesn’t extend the current rules, the estate tax exemption reverts to the 2017 amount of about half of today’s limit.

Many more families could suddenly become exposed to massive tax bills.

If leaving a legacy to your loved ones is important to you, reviewing your estate strategy for red flags is vital. 

Given the fluid nature of tax regulations, taking proactive measures now can safeguard your family’s financial future. 

Sources:

  1. https://www.kiplinger.com/retirement/irs-changed-rules-on-your-childrens-inheritance
  2. https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies
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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Talking to your Aging Parents about Finances

For many families, finances are rarely discussed in detail, even as children mature into adulthood. But as your parents age, especially if they live into their 80s and 90s, there’s a chance that they may lose their cognitive function and be less capable of managing various tasks. This can be upsetting for some parents and they may try to fight it, or deny that it’s happening.

While you may encounter some resistance, it’s important to talk to your parents about their finances and work through potential issues they may face as they age. Waiting until past due notices start piling up, or worse, your parents fall prey to a scam, can make life more difficult for everyone. Preparing now to try to prevent these problems is easier than trying to pick up the pieces after everything falls apart. Once your parents understand that you’re coming from a place of love and understanding, they will slowly come around.

Here are some suggestions for preparation steps you can take right now.

Get Your Own Financial House in Order

If you plan on helping your parents later in their lives, you should try to be in a financially secure place yourself. Check that your current financial strategy considers contingencies like assisting your aging parents.

Read the Room

You know your parents, so you know how they may react to a conversation about their finances. If you feel they wouldn’t react well to a scheduled meeting, try to work finance-related topics into your regular conversations. Be patient, as it may take a few conversations before your parents open up.

Discuss Financial and Estate Planning Goals

Talk to your parents about their lifestyle, needs, and priorities as they age. Check if they have an estate plan in place, or are working with an estate planning professional. If they haven’t done so recently, they may want to look into hiring a financial professional to review their retirement planning strategy.

Make a Checklist

Determine what your parents have in place, and check that they have proper, up-to-date documentation. Some of the main documents they may have are:

  • Current will
  • Living trust
  • Durable powers of attorney
  • Medical directives
  • Insurance policies
  • Health records
  • Tax returns
  • Credit card and loan documents
  • Bank and investment statements
  • Social Security information
  • Location of safe deposit boxes and their keys
  • Contact information for all professionals

Enlist Some Help

If you have siblings, include them in your conversations. They can help relieve some of the emotional burden on you and provide support while you talk to your parents. You may want to consider including a financial professional in your conversations as well. They can act as an objective third-party as you navigate some of the more emotional conversations around aging and finances.

Explore Long-Term Care Insurance

Insurance is one way to help offset the financial burden of long-term care if one or both of your parents need it. A private room in a nursing home could cost over $108,000 a year, and if paying out of pocket, that can quickly deplete assets. Learn More

Research Senior Assistance Programs

Investigate the service and resources available to seniors, both government and community-provided programs. If you aren’t sure where to start, the ACL Eldercare Locator can help you find programs in your area.

Respect Their Dignity

It can be hard for parents to let their children help with their finances, especially if they’ve been independent for several decades. They’ve spent a large part of their lives managing a household and being in charge. Many of these suggested steps can be taken gradually, and you can adjust as your parents become more comfortable with discussing their financial picture.

Sources
“Nursing Home Costs in 2022”, SeniorLiving.org, April 20, 2022, https://www.seniorliving.org/nursing-homes/costs/

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Maximizing Your Impact: Year-End Tax Strategies Through Charitable Giving and QCDs

As the year draws to a close, it’s not only a time for festive celebrations but also an opportunity to take a closer look at your financial situation and explore strategic moves to optimize your tax position. One avenue worth considering is charitable giving, coupled with Qualified Charitable Distributions (QCDs), a combination that can not only make a positive impact on the causes you care about but also provide potential tax benefits. In this blog post, we’ll delve into year-end tax strategies, the power of charitable giving, and the advantages of utilizing QCDs.

Charitable Giving: A Heartfelt Approach to Tax Planning

Charitable giving is a powerful way to contribute to the well-being of society while also offering potential tax advantages. By donating to qualified charities, you may be eligible for deductions that can reduce your taxable income. However, to maximize these benefits, it’s essential to be strategic in your approach.

  1. Review Your Finances: Before making any charitable contributions, take stock of your financial situation. Consider factors such as your income, potential tax liabilities, and overall financial goals. This assessment will help you determine the optimal amount to donate.
  2. Donate Appreciated Assets: If you have investments that have appreciated over time, donating them directly to a charity can be advantageous. By doing so, you not only support a cause but may also avoid capital gains taxes that would apply if you sold the assets.
  3. Bunch Your Donations: The standard deduction has increased in recent years, making it more challenging for some taxpayers to itemize deductions. Bunching your charitable contributions—making larger donations in specific years—can help you exceed the standard deduction threshold, making itemization more beneficial in those years.

Qualified Charitable Distributions (QCDs): A Tax-Efficient Giving Strategy

For individuals aged 70½ or older, QCDs offer a unique opportunity to support charities while potentially minimizing taxable income.

  1. Understand QCDs: A Qualified Charitable Distribution allows you to directly transfer funds from your Individual Retirement Account (IRA) to a qualified charity. This distribution counts towards your Required Minimum Distribution (RMD) without being included in your taxable income.
  2. Take Advantage of Tax Efficiency: Since QCDs aren’t considered taxable income, they can be a tax-efficient way to meet your charitable goals. By reducing your taxable income, you may also lower your adjusted gross income (AGI), potentially impacting other aspects of your tax liability.
  3. Be Mindful of Limits: While QCDs offer tax benefits, there are limits to the amount you can distribute annually. Currently, the maximum annual QCD is $105,000 per taxpayer (up from $100,000 in 2023). Be sure to stay within these limits to fully leverage the tax advantages.

  • As the year concludes, incorporating charitable giving and QCDs into your financial planning can be a rewarding and tax-smart strategy. By aligning your philanthropic goals with effective tax planning, you not only make a positive impact on the causes you support but also optimize your financial position. As always, it’s advisable to consult with a tax professional to tailor these strategies to your specific circumstances and ensure compliance with current tax laws.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

 

Navigating 2024 Gifting & Estate Taxes

Understanding the Dos & Don’ts, Lifetime Exclusions and Form 709

Familial gifting can be a heartfelt way to express love and generosity, but it’s essential to be aware of the potential tax implications that come with it. The Internal Revenue Service (IRS) keeps a watchful eye on large gifts, and understanding the rules and regulations is crucial to ensure a smooth process. In this guide, we’ll delve into the intricacies of familial gifting, the IRS Form 709, and the all-important lifetime exclusion amounts.

Familial Gifting

Familial gifting involves giving money or property to family members, often as a way to provide financial support or pass on assets. While the intention is usually altruistic, the IRS has rules in place to prevent individuals from using gifts to avoid estate taxes.

The IRS Form 709

When a gift exceeds a certain value, it triggers the need for filing IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form provides the IRS with information about the gift, including its value and the identities of both the giver and the recipient.

This form allows you to report gifts made in excess of the annual allowed exclusion ($18,000 in 2024), and it tells the IRS whether you’re paying gift tax now or would like to defer it until the time of your death. Form 709 is filed by the person giving the taxable gifts, who is also responsible for paying any associated gift tax. Form 709 may also be completed to assign gifts to your lifetime exemption.

Lifetime Exclusion Amounts

One crucial concept to grasp is the lifetime exclusion amount, which represents the total value of gifts an individual can give throughout their lifetime without incurring gift taxes. The lifetime exclusion amount as of 2024 is $13.61 million per person. As an example, you can apply the $18,000 annual exclusion for 2024 to a gift and only pay tax on the remaining balance, or you can apply your gifts to the lifetime unified credit so you can potentially avoid paying gift tax entirely on the gift you made in 2024.

It is important to remember that this lifetime exclusion is referred to as a “Lifetime Unifies Credit” by the IRS. This means that any gifts you apply to your lifetime exclusion will be added to the value of your net estate when you pass. So as an example, $600,000 of gifts would be added to your $11.5 million net estate for a total of $12.1 million. So long as your total does not exceed the exclusion amount of $13.61 million for 2024, an estate tax return would not be required. There’s one big caveat to be aware of: the $13.61 million exception is temporary and only applies to tax years up to 2025. Unless Congress makes these changes permanent, after 2025 the exemption will revert to the $5.49 million exemption (adjusted for inflation). Contact LBDIAS for help in planning how to best take advantage of the current exemption amount.

Annual Exclusion

In addition to the lifetime exclusion amount, there’s also an annual exclusion for gifts. The annual exclusion for 2024 is $18,000 per person ($36,000 per married couple if the gift is “split”). This means you can gift up to $18,000 to any individual in a calendar year without triggering gift taxes or the need to file Form 709. The annual gift exclusion is indexed inflation and usually increases by $1,000 each tax year.

Some Gifts Are Exempt

  • Gifts between spouses are generally exempt from gift taxes. This means that you can give unlimited amounts to your spouse without triggering the need to file Form 709. Gifts made to a spouse who isn’t a U.S. citizen are taxable, however. The threshold is $185,000 for tax year 2024. Gifts exceeding this amount are subject to the gift tax.
  • You can pay someone’s tuition or medical expenses without incurring the gift tax, as long as you pay the institution or the care provider directly.
  • Gifts to charities and to political organizations are tax-exempt as well.

Familial gifting is a wonderful way to share wealth and support loved ones. However, it’s crucial to navigate the tax landscape carefully. Understanding the IRS Form 709 and keeping track of lifetime exclusion amounts can help ensure a smooth and tax-efficient gifting process. As tax laws can change, consulting with a qualified wealth advisor and tax professional is always a wise decision to stay up-to-date and make informed decisions regarding familial gifting and taxes.

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Life By Design Investment Advisory Services is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.