When you hear about the estate tax, you would naturally consider lifetime gift giving as a way to avoid it. Unfortunately, this is not a viable solution because of the federal gift tax, which works hand in hand with the estate tax.
Let’s take a look at the details.
Understanding the Estate Tax
The federal estate tax can significantly impact your family’s financial future if you have accumulated substantial wealth.
At the time of this writing in 2025, the estate tax exclusion is $13.99 million. This means that the estate tax applies to the portion of your estate that exceeds this exclusion amount. The tax rate can be as high as 40 percent.
This exclusion is historically high but is set to change. In 2026, the exclusion will revert to the 2017 level of $5.49 million indexed for inflation.
Transfers between spouses are not subject to this tax due to the unlimited marital deduction. Additionally, the exclusion is portable, meaning a surviving spouse can use their deceased spouse’s exclusion.
Federal Gift Tax
Giving large gifts during your lifetime might seem like a way to avoid the estate tax. However, the federal gift tax prevents this strategy. The gift tax has been in place continuously since 1932, ensuring that lifetime gifts are subject to taxation at the same rate as the estate tax.
The gift tax and the estate tax share a unified exclusion. This unified exclusion means that the $13.99 million exclusion applies to both your lifetime gifts and your estate. Large gifts given during your lifetime reduce the amount that can be excluded from your estate upon your death.
Annual Gift Tax Exclusion
While the gift tax covers large gifts, there is an annual exclusion that allows for tax-free gifting within certain limits.
In 2024, you can give up to $19,000 per year to an unlimited number of recipients without incurring gift tax. If you are married, you and your spouse can combine your exclusions to gift up to $38,000 per recipient annually.
This annual exclusion can be a strategic tool for reducing the taxable portion of your estate over time. For example, if you have married children, you and your spouse can give $38,000 annually to each child and their spouse. Over time, these gifts can add up, reducing the size of your taxable estate.
Additional Gift Tax Exclusions
There are other exclusions that can help you manage potential tax liabilities. These include tuition payments and medical expenses.
If you pay tuition directly to an educational institution, the gift tax does not apply. However, this exclusion only covers tuition and does not extend to other expenses such as books or living costs. You can still use the annual exclusion to assist with these additional expenses.
Similarly, you can pay medical bills for someone else without incurring gift tax. This exclusion covers payments made directly to medical service providers and can include health insurance premiums.
Using these exclusions effectively can help manage your estate and reduce potential tax burdens.
State-Level Estate Taxes
While the federal estate tax and gift tax are significant, it’s also essential to consider state-level estate taxes. A dozen states impose their own estate taxes with varying exclusion amounts.
North Carolina does not have a state estate tax, but the estate tax in another state could be applicable if you own valuable property in that state.
Need Help Now?
If you are ready to cut to the chase and work with a Charlotte, NC estate planning lawyer to put a plan in place, we can help. You can send us a message to request a consultation appointment, and we can be reached by phone at (704) 610-4276 (option 2).