The Biggest Financial Mistake You Could Be Making

and How to Fix It!

by James Lange, CPA/Attorney

 

Making more frequent and larger gifts to your heirs while you are alive can significantly improve your family’s finances.

If you have the potential to die with a lot of money—using the most conservative assumptions—your family could be heading into a Tax Armageddon.

Taxes on IRAs and retirement plans are now on steroids. The SECURE Act combined with the 2026 “sunset” provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) provides the fodder for income and estate tax increases. (In 2026, income taxes and estate taxes revert to 2017 rates adjusted for inflation.)

Looming federal estate tax and income taxes on your IRA could drastically reduce your legacy. Even with proactive planning on investments, Roth IRA conversions, and estate planning, your family’s tax bill could be massive (penalized because you died with too much retirement money).

Of course, you must overprotect yourself and your spouse, but if there is excess wealth, there should be a plan for it. “Excess wealth” will go to taxes, family, or charity. Of the three, we want to minimize taxes. This is where gifting, while you are alive, becomes a valuable strategy.

Let’s start with the basics: straightforward $15,000/yr. gifts per beneficiary (or $30,000/yr. if your spouse joins in the gift). If you are married and are making the gift to a married child, you can make a gift of $60,000/yr. ($30,000 to your child and $30,000 to his spouse). These gifts will not eat into the amount you may leave your heirs at your death without having to pay federal estate tax. In addition, these gifts will not be included in your state estate or inheritance tax burden.

At the next level, these gifts can also reduce income taxes. For example, you could give highly appreciated stock to a beneficiary who is in a lower tax bracket. Or your gift could fund life insurance, a child’s or grandchild’s Roth IRA, or a 529 education plan—each with the additional benefit of income-tax-free elements for your beneficiary.

Also, keep in mind that when you make a gift, you are reducing your estate by not only the value of the gift but also by the potential growth on the gift.

For example, you and your spouse make a $30,000 gift to your child. Assume you live for 20 years after you make the gift. Using a simple 7% interest rate, that $30,000 would have grown to $120,000 by the time you die. Pennsylvania inheritance tax savings alone would be $5,400 ($120,000 times 4.5%) and that is barely scratching the surface of what could be an effective gifting plan.

Then, there are gifts that exceed the $15,000 limit known as credit-consuming gifts. For example, let’s assume you make a $1,015,000 gift to one beneficiary. You exceeded your $15,000 limit by $1 million. That does not trigger an immediate gift tax but will reduce the amount you can pass at death estate tax-free by $1 million.

Again, factoring in the potential growth on the gift is essential. If you make a credit-consuming gift of $1 million and live 20 years, you have effectively reduced your estate by $4 million (the amount the $1 million would have grown to had you not made the gift.) True, your estate tax reduction would be reduced by the $1 million of the credit-consuming gift, but you still would reduce estate taxes on $3 million. Even at a 50% estate tax rate, that million-dollar gift could reduce your family’s estate tax burden by $1,500,000. PA inheritance taxes would be reduced by $180,000 ($4,000,000 times 4.5%).

Recently, worry about the federal estate tax has been a non-issue for many of us. At $11.7 million (or $23.4 million if you are married) for non-spouse beneficiaries, there was a lot of room. But the sunset provision in the TCJA drops the exclusion to $5 million-plus inflation in 2026. Both President Biden and Bernie Sanders have floated a $3.5 million exclusion; however, most experts think $5 million is more realistic. That said, federal estate taxes can devastate a family legacy if not properly avoided.

There is also another element of gifting while you are alive rather than after you are gone. Your kids and grandkids can benefit immediately. Think of your own situation. If someone gave you $15,000, or even $100,000 now, it would not likely change your life one iota. Think about what $100,000 would have meant to you 20 or 30 years ago.

Finally, I must confess that a bunch of my client’s children banded together and paid me a large sum of money to write this newsletter feature. Naming no names, telling no lies … I just want the humor, which I love, to be transparent to all.