Six Steps to Help Preserve Your Wealth Through Lifetime Gifting

One of the goals of estate planning is to account for and/or minimize federal estate taxes. In 2024, the federal estate tax exemption is $13.61 million per person – meaning an individual has to have over that amount in collective wealth in their taxable estate at their death to owe estate taxes. That exemption amount is doubled for a married couple, so federal estate taxes only apply to a limited number of Americans.

However, with the sunset of the Tax Cuts and Jobs Act at the end of 2025, the exemption amount will decrease to about $7 million per person, or about $14 million for a married couple. Unless Congress acts, more Americans will be affected by the estate tax post-2025.

While having a large estate to pass to your heirs can be a blessing, the tax implications may seem more like a curse since the estate tax is 40% of any amount over your available exemption. To plan for this tax, one option to consider is lifetime gifting. Some gifts can be made without impacting your lifetime exemption amount, such as the annual exclusion (which is $18,000 per person, per year) or gifts made directly for medical and education expenses. Bigger gifts, however, will eat away at your lifetime exemption amount.

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Sometimes it may make more sense to make big lifetime gifts. Instead of waiting until your death to pass assets to your family and loved ones, you can make those gifts during your lifetime and apply your exemption to those transfers now using today’s lower fair market value. The benefit of lifetime gifting is that it uses your exemption at its current historically high level, but also freezes the value of the assets for estate tax purposes, meaning even if the value of the gift increases before your death, it won’t increase your estate tax exposure once it’s been gifted.

Everybody likes to get gifts, right? Everybody especially likes to get monetary gifts. But everybody really likes to get exemption-planning gifts. Why? Because if you’re giving a gift to effectively use your exemption for estate tax planning purposes, it’s going to be a very large gift, probably close to the exemption amount. But how does that sort of gifting work? What are the steps you should take to comply with the law and maximize the use of your exemption? Below are the six steps of lifetime gifting, designed to outline the process. While these steps include gifts to irrevocable trusts, the same principles apply to outright gifts as well.

Step One: Update Core Estate Plan

The first step of gifting is to update your core estate plan. Your core estate plan includes your will, revocable living trust (if you have one), healthcare power of attorney, living will, and financial power of attorney, all of which will be the basis for your advanced trusts. Everyone, regardless of whether they have a taxable estate, should have updated estate planning documents that name powers of attorney if you’re incapacitated and an executor of your estate for when you pass away. Having updated documents is especially important if you do have a taxable estate because your will or revocable living trust may include testamentary trusts that will be tax advantageous to your estate, descendants, or other beneficiaries.

It’s also during this step that you should compile a complete net worth statement that will act as your blueprint to transfer your assets into the advanced trusts under step two.

Step Two: Create and Execute Advanced Trusts

It’s often more tax efficient to gift assets to your family in trust, as opposed to outright. These trusts can create protection from future estate taxes, creditors, and divorce. With that in mind, it’s during step two that you’ll probably hear about the “ABCs of Estate Planning.” You’ll hear your counsel talk about DGTs, LITs, SLATs, CLATs, and every other acronym under the sun. Don’t be intimidated, though – these different types of trusts, and their various names, are based on:

1. Who the grantor (the person who creates the trust) is.
2. Who the beneficiary or beneficiaries are.
3. How the trust is taxed.
4. What assets are going into the trust.

Based on these factors, you and your legal counsel will determine the best type of advanced trust for your estate. Your attorney will draft the trust, the grantor and the trustee will sign the trust agreement, and you’ll move on to step three.

Step Three: Prepare Assets for Gifting

Depending on what assets you decided to gift under step two, they may not be ready to go into a trust right away. For example, if a piece of real estate is being gifted to a trust that you set up for your kids, but you and your spouse own that real estate together, your spouse would need to deed the real estate to you before you could deed the real estate into the trust. There can be lots of movement here, so make sure you talk to your legal counsel and generally understand what’s going on and why.

Step Four: Transfer Assets into Trusts

Sign the deeds! Assign the business interest! Transfer the brokerage! Whatever documentation is necessary to move the assets that you’ve decided will be gifted to a trust can now be signed. Keep this date in mind, though – or make sure you use it consistently throughout your gifting – because you’ll need to know the exact value of the gift that you’ve made as of this date. While you may not know the exact value as of the date of the gift, you’ll find it in step five …

Step Five: Prepare Valuations for Adequate Disclosure

… which is when you’ll work on preparing valuations. The IRS requires the person giving the gift, whether in trust or outright, to adequately disclose the value of the gift made. What constitutes adequate disclosure depends on the asset itself. Some assets are easier to value, such as liquid assets sold in the open market. Other assets, such as small business interests or real estate, can vary as to what qualifies as adequate disclosure, which is why it’s important to work with a team of advisors you trust.

One thing to note – these valuations can get expensive. Valuation fees are usually in addition to your legal and accounting fees, even if you’re paying your attorney directly for them, so make sure you understand how those fees work.

Step Six: Prepare and File 709 Gift Tax Return

At this point, you have one or more irrevocable trusts, transfer documents, and valuations for all of your gifted assets. What now? It’s time to get that information to the IRS on a 709 Gift Tax Return. The 709 is due with your income tax return in the year following the date of your gift (so if you make a transfer on September 13, 2023, the 709 is due on April 15, 2024, or October 15, 2024, if you file an extension). Your CPA (and a qualified CPA is highly recommended for this sort of filing) will prepare and file the 709 and will attach all of the paperwork discussed throughout these steps. A timely filed 709 starts a three-year statute of limitations for the IRS to contest your transfer and valuation. It also notifies the IRS exactly how much of your lifetime exemption you’ve used and how much you’ll have left at your death (based on that year’s exemption amount and any previously gifted assets). Finally, you should discuss with your CPA the likelihood of your 709 being audited and what an audit would entail.

Conclusion

Who knew it would be so much work to give away your money!? As the six steps of lifetime gifting demonstrate, this is a very complicated process that can be time-consuming and quite expensive; however, the estate tax benefits can be huge. It’s important to work with a support team of financial advisors, attorneys, and CPAs you know and trust. We on the Savant Wealth Transfer Team can work with you and your team of professionals to help try to make these steps as easy as possible and to make sure that you understand what’s happening along the way.

And last but not least, make sure you remind your beneficiary to say thank you.

This is intended for educational purposes only. Savant is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.

Alaina B. Davalos Wealth Transfer Advisor JD

When Alaina was an attorney in private practice, she focused on both family planning and tax planning. She earned a bachelor of arts degree from the University of Richmond and a JD degree from Emory University School of Law in Atlanta. She is a member of the State Bar of Georgia.