Lifetime Exemption

The lifetime exemption is a set amount of cash or property that you can give away during your lifetime without having to pay federal gift taxes. This limit is based on the value of your estate at death, combined with an annual exclusion amount and a unified credit, which are adjusted yearly for inflation. It is a very useful tool for people who want to tax-free transfer their wealth to their loved ones. However, it is important to understand how it works and how to use it properly. The lifetime exemption is scheduled for sunset in 2026, and you should consider making significant gifts before that date. A financial advisor can help you navigate gift taxes and other financial questions.

In addition to the unified credit, there is also an annual exclusion amount that allows taxpayers to make gifts of up to $17,000 per recipient without using their lifetime exemption. The annual exclusion amounts are adjusted for inflation each year. In 2024, the annual exclusion is $17,000 per recipient or $34,000 for a married couple who chooses to split gifts. As the exemption amount is scheduled to decrease in 2026, it is important that you consider your wealth transfer strategies now. We can help you develop a plan to maximize your current exemption and incorporate flexibility into your estate planning should the law change.

How Does Lifetime Exemption Work?

The gift tax exemption allows you to give money and property away tax-free, up to a certain amount. This limit is unified with the estate tax exemption, and it is adjusted annually to account for inflation. However, there are some important things to keep in mind before making any significant gifts. 

Another common misconception is that the gift tax exemption only applies to cash gifts. This is not true, as you can also give non-cash assets, such as real estate and other investments. In addition, you can make direct payments for medical or educational expenses without having to worry about gift taxes.

It is also important to understand how the annual exclusion amount and the lifetime gift tax exemption work together. Many people mistakenly believe that if they exceed the annual exclusion amount, they will owe gift tax. This is incorrect, as there is no gift tax owed until the donor has exhausted his or her lifetime gift tax exemption equivalent at death, which is currently $12 million.

The amount of the exemption at death is based on the value of the donor’s gross estate, plus all lifetime gifts. However, there is an additional exemption for gifts made to a “skip” generation. This means that a person can gift up to $11.7 million per child or grandchild tax-free.