Watch This Lesson
Most people think of estate planning as a set of instructions that take effect after they die. Renee Parris teaches it differently. If the goal is to reduce what the government takes before your family gets the rest, the work has to happen while you are alive. Waiting until the estate is being settled means working with whatever is left after the tax is calculated.
This lesson covers two strategies that move wealth out of your taxable estate during your lifetime, and one reason to consider acting sooner rather than later.
The Question Most Families Ask — and the Better One
The question people bring to an estate planner is “how do I reduce or eliminate estate taxes?” Buried in it is an assumption: that this is a complicated legal problem solved by documents filed after death.
The better question is the one almost nobody asks: how do I move assets to my family during my lifetime, in a way that shrinks my future taxable estate without creating an income tax or inheritance tax problem for them?
That shift — from distribution after death to stewardship during life — is where most of the real savings live.
Strategy One: Annual Gifting
The federal government lets you give a certain amount to any one person each year with no gift tax return and no reduction in your lifetime exemption. A married couple can each use their own exclusion for the same recipient, which doubles the amount that moves per child, per year.
Here is Renee describing it:
Okay, so the first strategy is gifting. The threshold changes year to year… So if you’re a husband and wife, you have the ability to gift your children [the annual amount] a year each. So combined, that’s double that of course.
Do this consistently and the arithmetic compounds. Three children over ten years moves a meaningful share of an estate out of the taxable column, and every dollar of growth on those gifted assets happens on your children’s balance sheet rather than yours.
The number changes every year. The annual exclusion is adjusted for inflation, so confirm the current figure with your CPA before you write checks in January. Gifting above the limit is not illegal — it just requires a gift tax return and draws down your lifetime exemption.
Where the Money Comes From Matters More Than the Amount
This is the part people get wrong, and it is expensive. Renee is specific about it:
So cash that you obviously if it’s in tax deferred accounts, you still have to pay the taxes on it. But they don’t have to pay inheritance tax. They don’t have to claim it as income… You can do that each calendar year to go ahead and start transitioning their inheritance to them and reduce the inheritance taxation on it on the other side.
Two separate things are happening there.
On the receiving end, a gift is not income. Your children do not report it, do not pay tax on it, and it does not show up on their return. That is true regardless of the amount.
On the giving end, it depends entirely on which account you pull from. Money from a checking, savings, or brokerage account has already been taxed, so the transfer is clean. Money from a traditional IRA or 401(k) has not. Pulling it out is a taxable distribution to you at your ordinary income rate, and if you are under 59 and a half there may be a penalty on top. You gift the net, and you absorb the tax bill.
The practical sequence: gift from after-tax accounts first, and if you need to tap tax-deferred money, coordinate the withdrawal with your CPA so you know the real cost before the money moves.
Strategy Two: Skipping a Generation
The second strategy is for grandparents who want assets to land with their grandchildren directly rather than passing through their children’s estates.
Strategy number two is generational skipping, which again allows you to transfer assets now from yourself to your grandchildren. And again, save on the taxation of it. So instead of you giving it to your children, you’re skipping that generation.
The logic is straightforward. If wealth passes from you to your children and then from your children to your grandchildren, it potentially gets exposed to estate tax twice on its way down. Skipping a generation exposes it once.
The federal government anticipated this, which is why the generation-skipping transfer tax (GSTT) exists. It is a flat tax at the top estate tax rate, applied to transfers that skip a generation. But every taxpayer gets a GSTT exemption that runs parallel to the estate tax exemption, and used deliberately — often through an irrevocable trust built for the purpose, sometimes called a dynasty trust — it allows a substantial transfer to grandchildren with the tax skipped rather than doubled.
This is not a do-it-yourself strategy. The trust language has to be right, the exemption has to be allocated correctly on the return, and the cost of getting it wrong is the 40% rate you were trying to avoid. It is worth an attorney.
Why Timing Matters
Renee’s closing point in this lesson is about urgency, and it is the part worth sitting with.
Now with all of these strategies, of course, it depends on how long the law is written into existence… you always want to make sure you take advantage of what’s available while it’s available, right? The same way we say if you have tax deferred money and you need to convert that into like Roth accounts or whatever, you want to do it while taxes are on discount.
Exemption amounts are set by legislation, and legislation changes. The federal estate and gift tax exemption has been at a historic high in recent years under provisions with a statutory expiration date, and Congress has moved that date before. Nobody can tell you with certainty what the threshold will be in five years.
What that means in practice: an exemption you can use today is worth more than an exemption you hope will still be there later. Assets you move out of your estate now are out, along with every dollar they appreciate from here. The same assets moved after a lower exemption takes effect may be only partly shielded.
Renee’s analogy to a Roth conversion is apt. In both cases you are choosing to deal with the tax on today’s terms rather than betting that tomorrow’s terms will be friendlier.
What to Do With This
- Ask your CPA for this year’s annual gift exclusion amount and whether you and your spouse should be splitting gifts.
- Identify which of your accounts are after-tax and which are tax-deferred, so you know the real cost of any gift before you make it.
- If grandchildren are part of your plan, ask an estate planning attorney whether generation-skipping planning fits — and whether it should be done through a trust rather than outright.
- Ask what your estate would owe if the exemption dropped. If the answer is a number that bothers you, you have a timeline.
None of this is about avoiding a responsibility. It is about not paying a bill you were never required to pay, and leaving your family with assets instead of a tax problem.
This article is for educational purposes only and does not constitute legal, tax, or financial advice. Annual gift exclusions, lifetime exemptions, and generation-skipping transfer tax rules are set by statute and change with legislation and inflation adjustments. Confirm the figures that currently apply to you with a licensed estate planning attorney and a certified public accountant before acting.
About the instructor: Renee Parris is an estate planning educator with over 30 years of experience. This article is a companion piece to Renee’s course, Estate Planning, Simplified.
