Many clients worry about the estate tax when they consult with me. Too many clients fear potential taxes but don’t realize they are likely exempt. This post explains federal taxes at death and provides a gifting strategy for avoiding potential taxes.
What is the Estate Tax
First, I need to explain what the federal estate tax is and how it does not apply to most people. Why? Because an individual’s estate in 2025, minus gifts, must be more than $13.99 million at the time of death to pay estate taxes. Idaho does not have a separate estate tax so people in Idaho only need to worry about the federal amount. Unfortunately, the amount could be reduced to around $7 million at the end of 2025 if Congress does not act. I don’t have a reliable fortune teller or crystal ball to tell me if that will happen or not. Stay tuned for future posts on this topic as the end of the year approaches.
What is the Gift Tax
Think of the annual gift tax exclusion as the maximum amount you can give a single person without reporting it to the IRS. When you give a single person more than this amount, you need to file Form 709 Gift Tax Return. The amount increases annually for inflation and is $19,000 for 2025. In simple terms, this means you can give $19,000 to anyone you want in 2025 without telling the IRS. Married couples can give $36,000 to a single person without reporting it to the IRS.
The Gift Tax May Affect Your Estate Tax Exemption Amount
Transfers into a Revocable Living Trust are not completed gifts for tax purposes. Therefore, they do not trigger the gift tax. However, when you give more than the annual gift tax amount to a person, it reduces your lifetime estate tax exemption amount by the excess. So if you give $49,000 in 2025 to one of your children for a down payment on a house, you exceeded the 2025 annual gift tax by $30,000. Therefore, your lifetime estate tax amount of $13.99 million is reduced by $30,000. Still probably not a worry for most people, right? Because in this example you can still give away an additional $13.96 million without triggering a federal tax at death.
A Gifting Strategy for the Wealthy
If the possible reduction of the estate tax amount to $7 million in 2026 worries you, begin an annual gifting strategy. Give each of your family members the maximum gift amount of $19,000 this year. Repeat this gifting strategy next year based on the inflation-adjusted amount. If any of your intended beneficiaries are minors, consider setting up a trust to manage the money on their behalf.
The following example illustrates how this may work. A married couple built a private company worth less than $7 million today but they may live much longer and see their net worth increase. They have two adult children and five grandchildren, only one of which is in college. They don’t think their grandchildren will be able to manage money effectively until after they graduate college and get a job.
Here comes the math: they give all of their children and grandchildren the maximum amount this year. $19,000 (max gift amount each) x 2 (for a married couple) x 7 (kids and grandkids) = $266,000. They just reduced the size of their taxable estate by $266,000 but paid no taxes and didn’t have to report to the IRS. They can also establish an Asset Protection Trust for each grandchild until they reach age 25, or 30, or whatever they decide is a reasonable age.
If you need more information and want to consult an estate planning attorney to minimize taxes and maximize gifting, contact me to schedule an appointment.