One of the most overlooked yet crucial elements of estate planning is understanding how your assets will be taxed when transferred to your heirs. Many high-net-worth individuals assume that whether they transfer assets during their lifetime or after death, the tax consequences will be similar. Unfortunately, this is a costly misconception.
The truth is that gift tax and estate tax operate under entirely different structures, with gift tax being tax-exclusive and estate tax being tax-inclusive—a distinction that can mean millions of dollars in unnecessary taxes if not properly planned for.
💡 What’s the Difference?
✅ Gift tax is tax-exclusive: When you make a taxable gift during your lifetime, the tax is paid separately from your remaining assets. This means the gifted amount alone is subject to tax, while your remaining wealth covers the tax bill.
✅ Estate tax is tax-inclusive: At death, the estate tax applies to everything you own, including the amount needed to pay the tax itself. This means your assets are taxed at a much higher effective rate, as the tax payment is drawn directly from your estate.
In short, gifting during life allows you to transfer more wealth at a lower tax cost, whereas waiting until death results in a significantly higher tax burden.
🔢 Real-World Impact: A $10 Million Example
Let’s break it down with numbers:
➡️ You want to transfer $10 million to your heirs.
▶ If you gift it during life, assuming a 40% gift tax, you would need to pay the tax separately. The math works out to approximately $2.86 million in tax (effective tax rate of ~28.6%), leaving your heirs with the full $10 million you intended.
▶ If you wait until death, that same $10 million is subject to the full 40% estate tax. However, because estate tax is tax-inclusive, it means your estate actually needs $16.67 million to cover both the tax and the transfer—drastically increasing the amount lost to taxation.
💡 The takeaway? A proactive gifting strategy can result in substantial tax savings, ensuring more of your wealth passes to your heirs instead of the IRS.
⏳ Why Timing is Critical
While lifetime gifting has always been a powerful strategy, there’s an added urgency right now: The current estate and gift tax exemption—historically high at $13.99 million per person in 2025—is set to sunset at the end of this year, reverting to approximately $7 million per person in 2026 (as adjusted for inflation).
This means that any wealth above the reduced exemption amount will be subject to federal estate taxes at rates of up to 40%—unless action is taken now.
By implementing strategic gifting while today’s exemption levels remain high, you can lock in tax-free transfers and significantly reduce the taxable portion of your estate before the new laws take effect.
🚨 What You Can Do Now
🔹 Review your estate plan: Ensure you’re maximizing available exemptions and considering lifetime gifting strategies.
🔹 Take advantage of tax-efficient vehicles: intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), dynasty trusts, and other structures can help reduce your taxable estate.
🔹 Act before 2026: Once the exemption drops, missed opportunities could mean millions in unnecessary taxes.
The window of opportunity is closing. Let’s strategize together to protect your legacy and ensure your wealth benefits your loved ones—not the IRS.
📞 Contact us at 212-971-9770 or info@laramsass.com
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