Gifting in Transition Planning

In 2023, estates valued over $12.92 million are taxed federally at 40% on the excess. Giving gifts may help reduce or eliminate estate taxes by reducing the market value of your estate. Taxable gifts refer to the total fair market value of gifts given to others during a calendar year, which can include various types of property, money, or assets.

Gifts of up to $17,000 annually to an unlimited number of people are excluded from the gift tax and only trigger the need to file a gift tax return on amounts beyond that. Giving gifts to spouses and political or charitable organizations are not considered taxable gifts and are completely exempt from the $17,000 annual exclusion. Also exempt from the annual exclusion is paying for others’ education and medical expenses. Paying tuition directly to a school on another’s behalf is not considered a taxable gift. To gift payments on medical expenses, payments must be made directly to a healthcare provider, medical institution, or medical insurance company.

The person receiving the gift is not responsible for paying taxes on any gifts received. If taxable gifts per person are over the $17,000 annual exclusion amount, you can pay the gift tax of 18-40% or chose to reduce the lifetime exemption amount, currently at $12.92 million. Ohio does not impose a gift or estate tax, but some other states do.

When planning farm transitions, consider whether assets are appreciating in value, such as land or depreciating in value, like equipment. Gifting land can be a good strategy as prices continue to rise because the increasing value occurs in the giftee’s estate rather than increasing your estate value over time. This is helpful if your estate is close to the tax exemption limit which is currently $12.92 million, but set to cut in half in 2026 to be around $7 million. When gifting equipment, however, a step-up in tax basis does not occur like it would when it is inherited. This can limit the amount of depreciation the giftee can take on the equipment, as well as increase the taxable gain incurred when the equipment is sold.

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