How Estate and Gift Taxes Can Impact Your Financial Plan

estate taxes, gift taxes, financial planning

Heath Ledger’s death in 2008 is another tragic story of an extremely talented artist gone too young. The unfortunate circumstances of his death compounded the complexity of his estate, leaving lawyers and family in a difficult position.

Ledger’s global fame, his life straddled between Australia and the U.S., complicated the passing of his considerable estate. The situation morphed into a riddle rivaling his famous portrayal of the Joker. Was he an Australian citizen or an American landed immigrant? He had created a will, but since then had a daughter with a partner he wasn’t legally married to. Every angle on his estate distribution resulted in different tax approaches.

Celebrity status aside, gifting and estate plans can become their own thorny questions for investors.

Let’s look at estate and gift taxes and how to approach them. The fairly simple and utterly human act of giving something to someone is more complex than it might seem, especially when complicated by death and inheritance.

Taxes on Giving – What?

Why do you have to pay taxes on money you’re giving away? It’s yours! This may be your initial question: Why is it the government’s business how much I give and to who?

Giving and exchanging property and assets has been used often as a tax dodge, and the government wised up. Essentially, money-savvy wealth builders were able to gift and re-gift assets to shrink their tax footprint. They also used inheritances as a tax shelter, and passed on a dynasty of wealth essentially under the radar.

So the federal gift tax was imposed as a safeguard against moving large amounts of wealth around to avoid taxes. But there are a few things to keep in mind before you rewrite your will.

First of all, large amounts of wealth. As we’ll see, there’s a long way to go before you get into taxable territory. Second, this is a lifetime cumulative amount. There’s not a low amount you hit every year that rockets you into taxes over and over. Third, inheritances aren’t considered income, so you don’t have to worry about Junior having to pay taxes on the family farm, at least at the initial transfer.

Gift and Estate Tax – The Basics

There are essentially two figures you need to know that guide this whole discussion:

  • $15,000 – Annual Gift Tax exemption
  • $11.58 million – Lifetime Exemption Amount or Estate Exemption amount.

Put those two figures in your pocket. Although the topic may seem daunting when you first see it, as financial issues can often be, it’s relatively simple at its root.


This is the annual gift tax exclusion, which falls into the “giving while you’re living” category. Now, a lot of us may not be thinking of passing a check for 15 grand to our nephew for his birthday, but think twice about it.

Maybe not raw cash, but what if you’re giving a summer home to a relative? What if you’re passing on your prize Ford Mustang – valued at $26,000 but emotionally priceless – because you’re no longer driving or need the garage space? That could take you above $15K fairly quickly.

But don’t pull back on those gifts quite yet. The issue at this point is mostly paperwork, not taxes. Whatever you give above the annual exclusion takes you into the lifetime exemption, which we’ll discuss below. The immediate consequence here is paperwork – you have to fill out a Form 709 to let the IRS know you’re above the amount.

Keep in mind that this exclusion is per recipient. You could give $15,000 to each of your dozen nieces and nephews that year and never touch the exemption threshold. It’s also a per giver amount. So if you and your spouse want to gift $30,000, give $15,000 from each of you and you won’t trouble the threshold.

$11,580,000 (At the Moment)

Once you rise above that threshold of $15,000 and file your Form 709, your Lifetime Exemption Amount comes into play. This is where you start to tally toward taxes. So, you give that prize Mustang worth $26,000 to your favorite nephew, and you end up with $9,000 counted against your lifetime exemption.

But the exemption, at least right now, is set at $11.58 million. That’s a lot of Mustangs!

The lifetime exemption is just that – a lifetime. You can give $11.58 million stretched over your entire life before you start getting taxed on it. That’s not an annual amount, but the complete giving amount for your four score on earth.

Again, the dollar number may seem astronomical to many of us. That might be more money than you’ll ever have and certainly more than you plan on giving away. However, think of it in terms of property and businesses. That Gold Coast property you got for a song in the ’70s has quintupled in value; the small business you own is now a chain. These items can add up quickly.

Estate Tax Exemption – A Mirror Amount

Right now, the lifetime exemption amount mirrors the Estate Tax Exemption amount. That is, they are both $11.58 million, but that’s in total.

Consider this scenario. Sally is generous with her kids, gifting them all sizable amounts to help pay for their first houses, start businesses or whatever investments they see fit. She ends up, after seven kids’ worth of generosity, giving away $2 million in all.

Then she meets with her financial advisor to review her estate plan. She’s gifted $2 million already, leaving her with $9.58 million that she can give the kids without incurring any kind of estate tax. This makes $11.58 million in total for her lifetime and estate giving.

Tax Cuts and Jobs Act Impact on Gift Tax – Act Now!

The estate tax exemption is higher than ever and the lifetime exemption mirrors it because of the Tax Cuts and Jobs Act of 2017. In 2017, the exemption was $5,490,000. In 2018, it almost doubled to $11,180,000. It’s been going up slightly every year since as it’s adjusted for inflation.

But this won’t last forever. The Tax Cuts and Jobs Act is set to expire after 2025. Then the estate tax levels would revert back to pre-TCJA levels if there’s no other legislation.

The lesson here is that it’s time to act. If you are giving away large amounts or transferring quite a bit in your estate plan, make and confirm that plan now, so you can take advantage of the high tax threshold.

The tax above the $11.58 million threshold is substantial: 40%! This is definitely worth avoiding and could dramatically eat into any legacy you’re trying to leave.

Gift Tax Considerations and Strategies

As we look ahead, we know the TCJA sunset in 2025, and the election in 2020 could mean changes in the administration and legislation. Most of us don’t want Uncle Sam to be our primary beneficiary, so there are a few things to keep in mind as you strategize your own giving and plan for your estate.

Stretch Act Eliminates IRA Stretch Provision

One estate planning strategy in the past was the “stretch IRA” in which a benefactor could “stretch” distributions from an IRA over a few decades. This helped kids, grandkids or other beneficiaries to supplement their income while flying below the tax radar, because the money was distributed in smaller amounts.

The SECURE Act, which went into effect in 2020, did away with this “stretch” strategy, requiring most non-spouse beneficiaries to completely distribute an inherited IRA in 10 years. This can bring inheritors into heavy taxes, and it’s important to strategize with your advisor.

One alternative that can “mimic” a stretch IRA is the Charitable Remainder Trust, which can work especially well for investors with a strong philanthropy practice.


We’ve mentioned this technique briefly above. The $15,000 a year exclusion is per giver and per recipient. You can leave $15,000 a year to as many different people as you want to without hitting the lifetime exemption amount. Also, if you and your spouse would like to give someone $30,000 of your family money, you can give half of it from each of you without hitting the threshold.

Charitable Giving

Charitable giving often can help your tax situation while you are living or within your estate plan. While you’re living, qualified donations can reduce your tax footprint and help you to strategically get below thresholds. They also don’t count toward your lifetime exemption amount.

In the same vein, bequests in your estate to charity don’t count toward the overall $11.58 million threshold. If you are already a regular giver to causes and groups, planning strategically here can help you keep your benefactors out of heavy tax territory.

Other Options to Maximize Gifts and Tax Planning

There are other options you can discuss with your advisor to optimize your giving and make a tax smart plan. Trusts, life insurance, Roth conversions and other strategies can help you minimize the tax burden to yourself and your beneficiaries. Your advisor can help you put together a custom strategy for your wealth profile and goals.

Wealth is About Legacy

Unlike many celebrity estate stories, this Knight’s Tale has a happy ending.

Five years before Heath Ledger’s death, probably when it became clear to him that he would be making a lot of money, he made a will leaving his estate to his parents and siblings. Then his daughter, Matilda, was born in 2005, but he never made another document.

Many expected Matilda’s mother to file a claim after his death. Court costs, along with estate taxes perhaps spread over two countries, could have significantly diminished this legacy, but the family came together to preserve the legacy Ledger would have wanted. His father, Kim Ledger, said it best: “There is no claim. Our family has gifted everything to Matilda.”

If you know anything about wealth, you know it involves not only yourself but those you love. It’s about legacy, giving away not just resources, but values and perspective that make life worth the trip. Get in touch with your financial advisor today to put together a strategy to help you optimize your gifting and estate plans.

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