Estate taxes are a concern for many people who have established financial independence. Estates worth millions of dollars are theoretically subject to costly estate taxes. The personal representative of an estate may have to liquidate assets or withdraw hundreds of thousands of dollars in capital from financial accounts to cover estate tax obligations.
Many successful individuals thinking about their legacies implement strategies to avoid or minimize estate taxes. Gifts are often an important part of an estate tax strategy. Testators can make gifts to their loved ones while they are still alive that diminish the value of their estate and therefore reduce the likelihood of major estate tax obligations.
What do those considering strategic gifting for tax purposes need to know about that process?
There’s a limit to tax-exempt gifting
Every year, the federal government reviews and adjusts certain tax exemption standards. For example, the maximum value of an estate that doesn’t have to pay estate tax changes from one year to the next. The amount of gifts people can make without incurring tax liability can also change annually.
In 2025, one person can gift another up to $19,000 without triggering any tax obligations. For those with multiple children and grandchildren, a gift of the maximum possible amount annually could help significantly reduce the overall value of the estate.
Particularly when people make gifts for multiple successive years, they can potentially reduce the value of the estate by hundreds of thousands of dollars or more with tax-free gifts. They also get to enjoy witnessing their loved ones use their inheritance to enrich their lives.
Some gifts can affect estate value
When calculating the value of an estate to determine if estate taxes are a concern and what tax rate may apply, the property that remains after someone dies isn’t the only consideration. Typically, the personal representative of the estate also has to go back over an individual’s finances for several years.
Gifts made in the 3 years prior to an individual’s death can count toward the overall value of the estate. Older adults may want to eventually stop making strategic gifts to streamline the probate process and reduce the risk of those gifts causing tax complications.
Gifts can be a useful means of limiting estate tax liability, but they are usually part of a broader estate plan that includes several legal documents as well. Reviewing personal holdings with a skilled legal team can help people determine how to protect their legacy and limit tax obligations after they die.