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The practical limits of using gifts to keep assets out of probate

On Behalf of | Apr 29, 2024 | Estate Planning |

People who are planning their estates often use a variety of tactics to keep their assets out of probate court. Strategic gifts can be an important element of a tax avoidance or wealth management strategy. Gifts that someone makes while they are still alive can diminish the value of their estate.

The resources that they transfer to others before they die do not have to pass through probate court. The testator also benefits from getting to watch their beneficiaries use their inheritance. Someone who makes regular gifts to their grandchildren, for example, can watch as those resources help cover college costs or assist with their first home purchase. Yet, while gifts are a useful estate planning tool, testators do need to understand the limits on gifts when using them as a way of keeping assets out of probate court.

Gifts can trigger taxes

Gift taxes can be a real concern for those with hundreds of thousands of dollars in resources. Individuals can only gift a certain amount of property and money to others before gift taxes come into play. In 2024, the federal limit for gift taxes is $18,000 per recipient. Married couples can have each spouse gift each intended beneficiary up to the maximum amount, potentially doubling their exemptions. Any gift beyond that amount could lead to tax liability. Therefore, people using gifts to keep assets out of probate court may need to plan their gifts carefully and limit what they offer to each loved one annually.

Gifts can affect the value of an estate

Reducing the value of an estate is one of the reasons people try to keep resources out of probate court. If the total value of the estate is too high, then estate taxes may apply. The gifts that someone makes later in life can contribute to the total value of their estate. The gifts made in the three years prior to someone’s death contribute to the value of their estate and could push it over the threshold for estate tax exemption.

There are other ways to reduce the value of an estate beyond simply making strategic gifts while someone is still alive. Using a variety of estate planning tools can help testators transfer assets outside of probate court and protect their legacy. Gifts can be an important element of probate avoidance plans, but they are often best used in conjunction with other arrangements.

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