Succession and Gift Tax Planning

Succession and Gift Tax Planning

Support Your Family and the Causes That Matter to You While Minimizing Your Tax Liability

Gifting and charitable contributions are entirely legal and tax advantaged strategies that play an important role in the tax plans of many Phoenix residents and families. The rules and limits for gift and charitable giving tax exemptions change slightly from year to year. For the 2022 tax year the estate tax exclusion was $12,060,000, with a gift tax annual exclusion of $16,000. This went up in 2023 to an estate tax exclusion of $12,920,000 and a gift tax annual exclusion of $17,000.  

It's important to recognize that you don’t actually have to pay gift taxes if you exceed the annual exclusion amount to a single recipient – you only have to start paying gift taxes if you exceed the lifetime exclusion amount. 
Tax laws change, so future years will inevitably have different limits. The team at H&H Accounting Services can help you understand the current exclusions and explain your options. 

Things to Know About Gifting, Charitable Contributions and Succession Planning

Gifting

The IRS allows individuals to make gifts up to a certain amount each year without adding toward their lifetime estate tax exclusion limit. Visit the IRS’ website for more information on the current year’s annual exclusion. As of 2023, the annual exclusion is $17,000. Gifted amounts above the annual exclusion are added to the lifetime gift tax exclusion. Once that limit has been reached, recipients will begin owing gift taxes.

What Is the Lifetime Gift Tax Exclusion and How Does it Work?

The lifetime gift tax exclusion is the maximum total one can give before they’ll need to begin paying taxes on the money they’re gifting. Here’s an example to illustrate how this might work for a hypothetical charitable giver:

1. Your current lifetime exclusion is at $1,500,000 million 
2. You gift your granddaughter $117,000 in 2023 
3. The additional $100,000 beyond the $17,000 exclusion is added to your lifetime exclusion  
4. You’re now at $1,600,000 – which is thankfully still far off the $12,920,000 lifetime exclusion of 2023

If you exceed your lifetime exclusion, you’ll need to start paying a high tax rate on any gifts above the annual exclusion amount. The lowest rate for gift taxes is 18 percent and the highest is 40 percent. The taxes are paid by the donor, not the gift recipient. You’ll only need to pay these taxes if you exceed the lifetime exclusion limit, which may increase (or potentially even decrease depending on who is writing tax laws) in the future. 

Some gifts are exempt, like gifts between spouses. It’s also worth noting that while the giver needs to report the gift, recipients often aren’t required to do so. You can technically gift more than the lifetime exclusion without incurring taxes if you schedule out your giving over many years. As long as you don’t exceed the annual exemption limit to an individual gift recipient in any given year, you won’t add to your lifetime exclusion.

Charitable Contributions 

You can lower your tax burden via generosity thanks to modern tax laws that allow exclusions based on donations to qualified charitable organizations. The donation amount can be deducted from your annual income, reducing your tax burden and potentially knocking you down into a lower bracket.



The Benefits of Donating Assets Instead of Cash 

When people think of donations, they generally think of writing checks – or those commercials that encourage people to donate junk cars to various causes for tax deductions. Donating old cars and money are not your only options, or even your best charitable giving options.



Most charitable organizations will accept assets like real estate or equities – and there’s a compelling reason to donate these types of assets – especially if they’ve appreciated.

Donated assets that you’ve held for at least a year prior to the donation can be deducted at their fair market value – meaning you claim the deduction while simultaneously dodging the capital gains you would have incurred had you sold the asset for a profit.


What Is a Charitable Remainder Trust (CRT) and Why Might You Use One?

A CRT is a way to simultaneously retain income while donating some assets. Like all trusts, you transfer assets into the CRT. When you pass away (or after a specific period of time you dictate when establishing the trust) the assets will automatically be donated to the specified charity or charities. This offers immediate tax deductions and, like with donating assets, bypasses capital gains taxes. 

Should You Consider Donor-Advised Funds (DAFs)?

DAFs allow you to make a charitable contribution, receive an immediate tax benefit and then direct grants from the fund to your favorite charities over time. It can be a convenient way to consolidate, coordinate and maximize your charitable giving. 

While gifting and charitable contributions can provide tax benefits, they must be done with careful planning and within IRS guidelines. Consulting with an experienced tax advisor is often a good idea if you are thinking about putting money into a DAF. 

How Gifting Intersects with Succession Planning

Gifting is particularly important for people who want to preserve a family business, as gift tax exclusions can be leveraged in order to transfer business assets gradually. This can be especially powerful when planned and executed with the help of an experienced CPA. It may give you the opportunity to retain control of the business and gradually move it to a family member while they’re adjusting to their new role and you transition into retirement.



  • Generation-Skipping Transfers

    Another aspect of succession planning is the use of generation-skipping transfers (GSTs), which allow wealth to be passed down to grandchildren or later generations, bypassing the children's generation. This approach can be useful for reducing estate taxes, though it requires careful planning due to the potential for a generation-skipping transfer tax. 

  • Establishing Trusts

    Gifting can be done directly or by using various types of trusts, such as a Grantor Retained Annuity Trust (GRAT), a Charitable Lead Trust (CLT) or a Family Limited Partnership (FLP). 

    These vehicles can provide the giver with more control over the gifted assets and offer various tax advantages. 


  • Education and Medical Expenses

    Direct payments made to educational institutions for tuition or medical organizations for care aren't considered taxable gifts, offering another strategy for wealth transfer without tax implications. 

  • Utilizing Lifetime Gift Tax Exclusion

    For those with significant estates, leveraging the lifetime gift tax exclusion (as of 2023, $12.92 million for individuals and $25.84 million for couples) can allow substantial wealth transfers without incurring gift or estate taxes. Gift and succession tax planning requires a deep understanding of tax laws and individual financial situations, which is why it’s usually a good idea to consult with a tax professional prior to drawing out your gift giving strategy. 

Get Help with Your Succession or Gifting Tax Plan in Phoenix

If you’re interested in learning how you can minimize your tax burden while ensuring the smooth transfer of wealth or businesses to your children or grandchildren, the CPA and accounting experts at H&H Accounting Services can help. Call us at (480) 561-5805 to schedule a one-hour consultation. 


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