Inheritance Tax

Derek Notman |

How to use the new (2019) estate & gift tax limits to maximize the transfer of your wealth.

The well-known quote ‘’Nothing is certain except death and taxes’’ by Benjamin Franklin remains poignant and certainly rings true for many Americans.  When you give assets in the form of cash, stocks or a car perhaps, the government wants to know about it and will likely want to collect some taxes too.  Isn’t it great to know that a large portion of your gifts or estate is excluded from taxation, and there are numerous ways to give assets tax free?

As an experienced Certified Financial Planner® I would like to assist you in understanding how you can utilize the following strategies to transfer your wealth given the current inheritance tax rules.


Transferring Your Wealth

  1. Using the lifetime gift and estate tax exemption

In essence, giving assets to your chosen loved ones while still alive allows them to benefit from your gifts immediately and also gives you the satisfaction of seeing your gifts improve their lives.  Additionally, those gifts can grow value in their hands, rather than yours.  This does assist in reducing your taxable estate, which is always welcomed.

  1. How the gift tax “exclusion” works

Presently, you are permitted to give any number of people up to $15,000 each in a single year without incurring a taxable gift ($30,000 for spouses “splitting” gifts). The recipient typically owes no taxes and doesn't have to report the gift unless it comes from a foreign source.  An important point to remember here is, if your gift exceeds $15,000 to any person during the year, you have to report it on a gift tax return (IRS Form 709).  Spouses splitting gifts must always file Form 709, even when no taxable gift is incurred.  Once you give more than the annual gift tax exclusion, you begin to eat into your lifetime gift and estate tax exemption.

  1. How the gift and estate tax “exemption” works

With the passage of the Tax Cuts and Jobs Act (TCJA), the gift and estate tax exemption has increased significantly. The table below shows the current tax rate and exemption levels for the gift and estate tax:

Highest Tax Rate

Gift & Estate Exemption

Gift & Estate Exemption

(for gifts or estates over the exemption amount)

(2017 and prior years)

(2018 to 2025)


*Adjusted annually for inflation

$5.49 million*


$11.18 million*



The $11.18 million exemption, which was adjusted for inflation to $11.4 million in 2019, is applicable to gifts and estate taxes combined.  Whatever exemption is used for gifting will reduce the amount you are able to use for the estate tax. The IRS refers to this as a “unified credit.” Each donor (the person making the gift) has a separate lifetime exemption that can be used before any out-of-pocket gift tax is due. In addition, a couple can combine their exemptions to get a total exemption of over $22 million. 

A word of caution here - the $11.18 million exception is temporary and onlyapplies to tax years 2018 to 2025. Unless Congress makes these changes permanent, after 2025 the exemption will revert back to the $5.49 million exemption (adjusted for inflation).  

I can hear you asking yourself the all-important question about taking advantage of this new exemption before it disappears in 2025.


  1. How to lock in the new exemption

For most people, the gift and estate tax exemption will allow for the tax-free transfer of wealth from one generation to another. For those who have acquired enough wealth to surpass the gift and estate tax exemption, there are several strategies that could lock in the new $11.18 million exemption.

The simplest way is to gift your assets to your loved ones now, rather than waiting until you pass away. If you have the means, giving the assets now has two advantages. The first advantage is, you get to see your loved ones benefit from your gifts and secondly, the gifted assets could increase in value for your loved ones—and could decrease your taxable estate.

Let me give you an example: If you were able to give the entire $11.18 million to your beneficiaries today, that money could grow over time.  At a growth rate of 5% per year for 10 years, that $11.18 million gift could end up being worth over $18.2 million, and your loved ones will have received the entire amount free from gift or estate taxes.

On the flip side of the coin, if you held onto those assets and you passed away in 10 years, a large portion of the $18.2 million would be taxed at 40%.  Additionally, in 10 years the gift and estate tax exemption will have likely reverted to the lower $5.49 million amount (for dates after 2025).  That could result in your estate having to pay over $4.6 million in taxes, leaving your beneficiaries with about $13.6 million in assets rather than $18.2 million if you made the gift sooner.*

*Calculations assume the prior $5.49 million exception will be adjusted for inflation, estimated to be 2% per year, resulting in an exemption of $6.69 million in 10 years. The taxable estate would be $11.5 million ($18.2 million minus $6.69 million), resulting in $4.6 million in taxes ($11.5 million times the 40% tax rate).

  1. Ensuring your gifts are used and managed properly

A major concern when giving away assets early is that, at times, the person receiving the gift may not be ready to handle the responsibility of actually managing such a large amount of money.  Imagine a teenager having to manage $18 million – This is not likely to bode well.  A better solution would be to give them an irrevocable trust and make the child or teenager the beneficiary.

This method allows you to set the rules of the trust and determine how the assets will be invested and distributed. For instance, you could create a trust that stipulates the beneficiary can only have access to the income generated by the assets, or you could set specific rules, such as the beneficiary must graduate from college before having access to the funds in the trust.

  1. Alternative ways to give tax-free

Making unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift or affecting your $15,000 gift exclusion is an alternative way to give tax-free. This method is a great way to assist a loved one with a large medical bill, or to help pay for a family member’s education.

Another example is, say you wanted to pay your grandson’s $50,000 tuition towards his medical degree. You could pay the university directly for his tuition and still give him an additional $15,000 tax-free. This strategy reduces your taxable estate and helps preserve your lifetime exemption.

  1. Minimizing taxes for recipients

An important point to consider regarding the assets you gift, is that your cost basis will transfer over to the recipient. So, if that asset has appreciated in value significantly prior to the gift, the recipient could incur the substantial taxable gain when selling that asset. Highly appreciated assets that are received as part of an estate, on the other hand, generally get a “step up” in basis, which means a taxable gain could be avoided if the asset is sold soon after being received.

  1. What if your estate is worth more than the lifetime exemption?

If your estate is worth more than the federal limits what are you to do?  Well, there are a variety of ways to plan for transferring your wealth while limiting the amount of taxes you pay.  You can use things like family limited partnerships, irrevocable trusts, and even life insurance trusts.  Each situation is unique and requires the guidance of experts in financial planning, law, tax, and insurance.  Make sure to work with a team when figuring out the best strategies to legally avoid the inheritance tax.

  1. Exercise caution

Lifetime gifting can be a great strategy, as long as you leave yourself enough to live on.  For the gift to count, it has to be a complete and binding transfer.


This blog has focused on the federal inheritance tax implications for gifting and estates.  Depending on where you live, there could be state tax consequences for your gifts and estate in addition to the federal taxes.  I would like to suggest that in order to fully understand these strategies that you work in concert with your estate planning attorney and financial advisor to make sure you are covering your basis.

Although this can feel overwhelming, having an inheritance tax "problem" is actually a good thing since it means you have been successful in your endeavors!

Thank you for reading!


Derek Notman