Many people preparing for retirement or enjoying their first few years out of the workforce have to make careful financial plans for the future. Concerns about estate taxes or your future eligibility for Medicaid might require that you reduce what property you hold in your own name.
In addition to transferring some assets to a trust, you could also make gifts to family members and friends each year. That way, you can witness them enjoying their inheritance while simultaneously protecting yourself as you grow older.
However, you will have to consider gift taxes so that your generosity has a positive impact rather than negative tax consequences.
How gift taxes work
When you transfer property to someone else, there may eventually be taxes owed on the property that someone receives. Every year, you can gift up to a certain amount of cash or valuable property to people that you know without triggering taxes. Transfers over that limit will lead to tax obligations. The total amount you can gift changes annually.
In 2022, the gift tax exclusion amount per recipient was $16,000, and that limit will increase to $17,000 in 2023. Making strategic gifts to the beneficiaries of your estate now and for multiple years can provide them with crucial resources while slowly reducing the overall value of your personal estate.
How they affect your estate
The gifts that you make don’t just automatically disappear from the financial records when the next year occurs. For the purpose of applying for Medicaid, up to 60 months of transfers may be subject to scrutiny when you apply for benefits. Planning your gifting strategy so that you won’t be making sizable gifts after a certain age can be a smart choice for those worried that they may eventually require Medicaid benefits.
Additionally, you have to contemplate whether several years of gifts might push you over the threshold for estate taxes. Typically, the total value of your estate will include the current assets owned at the time of your death and the last three years of gifts.
Understanding how gift taxes can affect your estate plan can help you minimize tax risks and create more effective documents for your protection and the benefit of your loved ones.