Family Legacy Services

Strategies to lower your taxable estate now

One way to transfer your property with as little taxation as possible is to give money away during your lifetime.

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Points to know

  • 3 strategies to reduce the taxes your heirs pay on your estate: Share your wealth with your loved ones, give gifts to charities, and convert traditional IRA assets to a Roth IRA.
  • Paying someone's medical bills or educational expenses isn't considered a gift for tax purposes as long as the money is paid directly to the health care provider or school, and there's no limit to the amount you can give.
  • Gifts to charities, if qualified, are tax-deductible.
  • Traditional IRA assets are taxed upon withdrawal, but Roth IRA assets aren't. So converting IRA assets into a Roth account shelters future earnings from income taxes.

The benefits of giving during your lifetime

When you pass away, your assets go to your heirs. But people with significant assets can lose a substantial amount to taxes.

You can give away money now and lessen the tax burden, so your heirs will receive more money from your estate.

Transferring assets during your lifetime yields 2 benefits:

  • You'll remove the assets—and any future appreciation—from your estate so your heirs won't have to pay estate taxes.
  • You'll have the pleasure of seeing how your gifts benefit the people and causes that are important to you.

Take advantage of annual exclusion gifts

You can gift any number of people tax-free each year with a set amount ($17,000 in 2023) not subject to gift taxes.

For example, you could give $17,000 a year to each of your 3 grandchildren and reduce your estate by $51,000 each year.

Gift under the lifetime exemption amount

If you're interested in giving more than $17,000 a year to loved ones, you can give a total of $12.92 million (in 2023) above that amount and remain exempt from gift taxes.

This exemption amount is adjusted for inflation annually. If you don't use up your exemption before you pass away, any unused portion will be used to exempt your estate from federal estate tax.

There's no time like the present

There's an advantage to giving away the $12.92 million rather than having your estate claim the exemption. When you give assets now, you also remove any future appreciation on those assets from your estate.

You can transfer an unlimited amount tax-free to a spouse who's a U.S. citizen. If you're married to a non-U.S. citizen, you can transfer up to a set amount annually ($175,000 in 2023).

Irrevocable trusts can give you more control

It's natural to worry that the money you give away may not be used as you intended. Gifting assets through an irrevocable trust gives you the opportunity to specify how and when the money can be used.

Pay for tuition or medical expenses

If you can help someone with medical bills or educational expenses, paying those costs isn't considered a gift for tax purposes as long as you pay the money directly to the health care provider or school.

There's no limit to the amount you can give, and it doesn't count against your lifetime exemption or the annual exclusion amounts.

You can also remove money from your estate by putting it aside for someone's future higher-education expenses. You can contribute a lump sum equal to up to 5 years of annual exclusion gifts per student (totaling $85,000 in 2023) to a 529 college savings plan or prepaid tuition plan.

But keep in mind that you can't make any additional annual exclusion gifts to the same person for the 5-year period.

Philanthropic gifts have an additional financial benefit: If qualified, your donations are tax-deductible.

A common way to give to charity is to give assets directly. But there may be other ways to structure your charitable giving to benefit your family.

Establish a donor-advised fund

A donor-advised fund is a public charity through which you can donate assets and recommend grants to other public charities.

One benefit of giving through a donor-advised fund is that you can receive an immediate tax deduction for your donation (subject to income tax limitations), and then recommend specific grants over time.

The assets you gift can also be invested in the markets, providing the opportunity for your donation to grow. You choose from among investments offered by the donor-advised fund's administrator.

Start a private foundation, charitable trust, or annuity

Direct gifts and donor-advised funds have the advantage of being simple and requiring minimal administration. But you could use other structures with different benefits.

For example, if you have substantial wealth and you want to run your own charity, you could create a private foundation, which lets you keep limited control over the assets. Charitable trusts may allow your heirs to benefit from the trust assets along with the designated charity. Charitable annuities pay you an income stream during your lifetime and may be offered by the charities you wish to support.

Some of these options may be complex and expensive to maintain so ask a qualified estate planning attorney whether they're right for you.

Consider which assets to give

No matter how you choose to donate assets, think about what type of assets you're giving. Donating cash is straightforward, but it might not be the most strategic option.

If you donate appreciated securities you've owned for more than a year, you'll avoid paying capital gains taxes on the appreciated value (in addition to being able to deduct the "security's" current market value.

Naming a charity as the beneficiary of your tax-deferred retirement accounts could benefit your heirs because those assets would otherwise be subject to income tax when they withdraw them (in addition to estate tax upon your death).

Leaving these assets to a qualified charity exempts them from taxes. You can then plan to leave taxable assets to your heirs because their cost basis will be "stepped up" on the date of your death, meaning little or no income tax may be due.

You could also contribute some of your traditional IRA assets during your lifetime, subject to certain limitations. Those who have reached age 70½ can have up to $100,000 of their annual distribution from their IRAs distributed directly to a 501(c)(3) public charity, enabling them to generally avoid paying income taxes on that amount. This is known as a qualified charitable distribution (QCD). For QCDs made after December 31, 2019, the non-taxable amount of the QCD is reduced by the deductible amount of IRA contributions made for all tax years ending on or after attaining age 70½. If you’ve made deductible IRA contributions for the year you turn 70½ or later, consult a qualified tax advisor prior to taking a QCD to determine the amount by which your QCD must be reduced.

Compare giving options PDF

You and your heirs might benefit if you convert traditional IRA assets to a Roth IRA—but it depends on the situation.

Traditional IRA assets are taxed upon withdrawal, but Roth IRA assets aren't. So converting IRA assets into a Roth shelters future earnings from income taxes.

However, you'll have to pay income taxes on the assets you convert at your current tax rate in the year of the conversion. This might be the cheaper option, but not always. It depends on your current and future tax rates.

Keep in mind that Roth IRAs may not be the best assets to leave to charity since you've already paid taxes on your contributions and converted amounts.

Take a closer look ... If you don't need your IRA money, should you convert it? Our experts offer some guidelines.

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✓ Custom financial plan

✓ Ongoing portfolio management

✓ Investment coaching

✓ Real-time goal tracking

✓ All at a low cost


Reach your goals with advice from Vanguard

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Vanguard family legacy services

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