Personal Finance

Considering Early Inheritance? How to Navigate Gift and Estate Taxes

John Seetoo

Published: February 7, 2025 2:58 pm

Families are often able to build up a substantial net worth through owning property, like a farm, or a small business. Unfortunately, time and time again, a patriarch’s plans to pass his legacy on to his wife and children has often been thwarted by the IRS. Thousands of small businesses and farms have wound up having to be sold in order to pay estate taxes that the family could not otherwise afford. 

Much to the hue and cry of his Democrat political foes, President Trump saw this gross unfairness and rolled back estate taxes during his first term. The 2017 tax reform bill that he signed more than doubled the previous $5.49 million exemption. Thankfully, the exemption inflation increases were kept in place. Congress will need to renew or increase the exemption further in 2026, when the 2017 exemption increases expire. Luckily, the new President Trump administration is in a strong position to work with Congress to see this become a reality.

Nevertheless, the fundamental principle of paying as little in estate taxes as legally permitted is still an imperative for many families. However, the IRS also imposes Gift Taxes on transfer of assets, so some nimble hopscotch is needed to navigate the IRS loopholes if one wants to preserve the bulk of an estate in the family’s hands.

Early Inheritance and The Strategy Playbook

In response to the estate tax issues,  the concept of “Early Inheritance” has become a trend that has caught on with many estate planners and their clients. By structuring distributions in the form of gifts that can stay under the IRS Gift Tax threshold while the donor/gifter is still alive, the family can keep the amounts within the hands of family members while legally keeping the government’s hands out of their pockets. An Early Inheritance strategy creates the following benefits:

• The donor can be assured that unencumbered bequests to heir will be received.
• The donor can offer direct guidance on the most efficient way to spend the funds if he or she has the prerequisite knowledge and experience.
• Funds that would have been used in any event (for home purchase, repairs, etc.) can still be utilized, ostensibly early enough so that costs are less than if the needs became more severe after the donor’s demise.
• Distributing from the estate before the donor’s demise reduces the estate’s net value, which can commensurately lower estate taxes post-demise.
• Funds intended for medical costs can be distributed from the estate in the form of gifts, rather than from current funds. This frees up current funds for other purposes while concurrently reducing estate size..
• Distribution of gifts prior to one’s demise helps the heirs receive and utilize funds immediately, and to avoid probate, which can sometimes take months, and thus hold up access to vitally needed funds.

The Gift Tax Road Map

The IRS Gift Tax starts at 18% and can go as high as 40% once thresholds have been triggered. The onus of payment responsibility falls on the giver, although the recipients may be liable for capital gains taxes if the gift was in stock that later appreciates in price prior to being sold. The market price on the date of the gift asset transfer becomes the new cost basis for any capital gains calculation.

Gift Tax Rules under current IRS guidelines, have two primary areas: 1) Annual Exclusions, which addresses gifts to individuals, and 2) Lifetime Exemptions, which refers to one’s estate.

• Exclusions: For 2025, the Gift Tax Exclusion is $19,000 per person, per year. This means that, for example,  if a married couple wanted to bequeath a gift to their adult son or daughter for $38,000, the father and mother could each gift up to $19,000 per year to their child tax-free. If a gift exceeded that amount, say, it came to $23,000, the IRS would levy taxes on the $4,000 differential – but only if the Lifetime Exemption has not been cumulatively surpassed. 
• Exemptions: The Lifetime Exemption, thanks to President Trump, was increased to $13.99 million. So the $4,000 overage on the gift would be filled out on Form 709 and the Lifetime Exemption, which covers one’s overall estate, both while alive as well as post-demise, would be reduced to $13.986 million. 

Within the Gift Tax itself are several exceptions that do not get counted into the $19,000 annual exclusion. These exceptions are:

• School tuition and education payments
• Charitable donations
• Medical expenses
• Political contributions
• Gifts to spouses and dependents

Additional strategies for gifting can include:

• Joint Tenancy Deed With Rights of Survivorship – In a joint tenancy deed structure, a new deed is created with the heir(s) names added to the deed of property ownership, which effectively removes the value of the property from the donor’s estate. The risk to this is if the heirs have unpaid debts, the property can become subject to foreclosure, so it is important to ensure there are no contingent liabilities before commencing this step. This strategy is also governed by state law, so the parameters and procedures will vary according to one’s domicile.
• Revocable Trusts – Establishing a trust to hold all of the assets for distribution in accordance to the grantor’s wishes is a way to shield assets from frivolous lawsuits or other problems prior to the grantor’s demise. A separate trustee is in charge of executing distributions in accordance to the grantor’s wishes. This is also a way to keep bequests to close and extended family members separate to avoid inter-family squabbles. The other benefit is that trusts will bypass probate court. 

The Estate and Gift Tax arenas are specialized areas of tax law. This article is intended to be read purely on an introductory information capacity. For more comprehensive advice, an estate tax professional should be consulted.