Has Gifting Lost Its Flair?

From 1987 to 1994, the Estate Tax Exemption was set at $600,000. If your estate was valued more than the exemption, you were assessed estate tax which could be as much as 55%. At that time, people often used their annual Gift Tax Exclusion to reduce the size of their estate and avoid estate tax. Over the last 30 years, the Estate Tax Exemption has increased to its 2024 level of $13.61 million for singles and $27.22 for married couples. With only a handful of estates exceeding the exemption and the annual gift tax exclusion for 2024 set at $18,000, it goes without saying the idea of gifting has lost its value, or so it might seem. Note: On January 1, 2026, the exemption will revert to 2017 levels, adjusted for inflation—about half of what they are now.

The question you might be asking yourself is, “How can I use gifting to my advantage?” That’s a great question! Many of our retirees and soon-to-be retirees are sitting on what I call Ticking Tax Bombs. As of September 20, 2023, there was $6.9 trillion in 401(k) plans alone. That doesn’t include IRAs, 403(b) plans and tax-deferred annuities. How much income tax do you think is owed on those tax deferred dollars? The answer is millions! It’s sad but true. You’ve worked hard to accumulate a nest egg, but the fact is that only about 65-70% of it is yours. If you have $1 million in your 401(k) and are planning to live off 5% interest or $50,000/annually you might want to re-evaluate. You will net $35,000-$40,000 after tax maybe less if you have other sources of income. This means you will have to take a larger distribution to meet your income needs which means you might not have any money left to leave as an inheritance.

If leaving an inheritance is a goal of yours, here’s an idea. Gift $18,000 to your beneficiary now. Apply for a permanent life insurance policy on your life but make them the owner and the beneficiary. Currently a 60-year-old non-smoking female rated preferred can purchase up to $1,300,000 of death benefit with $18,000. If the woman passed away after 5 years, the beneficiary would have had premium payments of $90,000 and receive $1,300,000 income-tax free. If the woman lived another 30 years, the beneficiary would have had premium payments of $540,000 and receive $1,300,000 income-tax free. The woman would have to live another 72 years to break even which is highly unlikely given she is 60-year-old. That is a heck of a tax-free ROI (return on investment).

The answer is a resounding, “No”. Gifting has not lost its flair. In fact, due to recent changes in the laws and regulations governing life insurance, gifting is now viewed in a completely different light. We can’t control the Estate Tax Exemption or Income-Tax rates for that matter. But we can leverage life insurance to replace assets to our estate upon our death that might have otherwise been lost to future estate and income tax liabilities. Note: The death benefit from a life insurance policy is always income tax free and if owned properly, will be estate tax free as well. Call 304.840.0706 for a quote today and see what life insurance can do for you!