Understanding How Gift and Estate Tax May Impact You

Are you thinking about making a significant financial gift to a loved one or reviewing your estate plan? You may want to consider how gift and estate taxes may be triggered by your gift and what that means for both you and the receiver. 

Gift Taxes

When property — such as cash, art, vehicles or real estate — is transferred to someone without the original owner receiving something of substantial value in return, the IRS considers this a gift. If that gift is above the annual gift tax limit ($17,000 in 2023 and $18,000 in 2024), the giver must pay taxes on the amount above the gift limit. 

It’s important to note that these limits are for individuals; in 2023, a married couple could give $34,000 to one recipient (each giving $17,000) tax-free. Even if the gift doesn’t exceed the annual limit, it must be reported to the IRS because there is a lifetime gift tax exclusion limit ($12.92 million in 2023 and $13.61 million in 2024) above which gift-tax would be triggered.

How Is Gift Tax Calculated?

Only the amount of the gift above the annual gift limit is subject to tax. For example, if someone gifted their child $20,000 in 2023, only $3,000 of that would be subject to tax. 

If the value of a gift isn’t evident — such as a piece of artwork — the fair market value must be used to assess tax liability. 

Estate Taxes

Estate taxes are sometimes owed on the transfer of property after someone’s death. Assets transferred to a spouse are exempt from estate tax, but beneficiaries must pay on estates worth more than the limit ($12.92 million in 2023 and $13.61 million in 2024). These taxes are paid before the assets from the estate have been distributed — beneficiaries may also be subject to inheritance tax or a state estate tax depending on their state of residence.  

How Is Estate Tax Calculated?

The estate’s fair market value is calculated — essentially, what would the property be worth on the current market? Property may include physical property and assets, as well as trusts, annuities and other financial assets. Then deductions are taken from the value of the estate for things like mortgages, estate administration and gifts to charitable organizations. Taxes are levied on the amount remaining if it exceeds the estate tax limit. 

Generation-Skipping Transfer (GST) Tax

The generation-skipping transfer tax is a tax on assets above the estate tax limit that go to someone who is at least 37 ½ years younger than the person giving the gift. It was implemented so people couldn’t avoid estate taxes by making gifts or bequests directly to grandchildren or great-grandchildren. In 2023, the GST tax was 40% on all property worth more than $12.92 million. 

Upcoming Changes to Gift, Estate and GST Taxes

Current gift and estate tax limits are high due to the increased gift tax exclusion amount that was put in place from 2018 to 2025. For the last few years, people have had the opportunity to transfer significant amounts of wealth without paying taxes. In 2026, the basic exclusion amount is expected to drop to pre-2018 levels — approximately $5 million before inflation adjustments. 

Ways to Gift Tax-Free

There are some ways to gift money tax-free:

• Give monetary gifts below the annual limit.
• You can make unlimited gifts for education if you give directly to the educational institution. These funds do not count toward the annual gift limit; for example, in 2024 you could pay $30,000 in tuition for your grandchild plus give them $18,000 for foods, books, travel, etc. tax-free. 
• You can make unlimited gifts for medical expenses if you give directly to the medical care provider.
• Married couples can give to each other tax-free with no limits. 
• You can make a gift to a political organization for its use. 
• You can utilize a trust.

Strategic Guidance

Even with the best of intentions, gifting wealth and leaving a legacy can go awry if you don’t have the right structure in place. Talk with a Farm Bureau agent or financial advisor about finding the right path for you and your loved ones