Include the Annual Exclusion in Your Estate Plan

When you create an estate plan, the primary goal is to ensure that all of your assets will be distributed according to your wishes when you pass away. Effective estate planning involves strategies that protect your wealth and reduce tax liabilities at death. Estate taxes can take a large portion of your assets if you don’t plan carefully. This leaves less for your beneficiaries. The tax code offers several tools to reduce this burden. The annual exclusion is one of the most powerful, yet underutilized strategies. It allows you to transfer wealth free of tax each year. A Indianapolis attorney from Frank and Kraft explains the benefits of incorporating the annual exemption into your estate planning to minimize the federal gift and estate tax exposure of your estate. The federal gift and estate taxes are currently set at 40 percent. That means without any deductions, exemptions, or tax planning strategies, almost half of your estate’s value could be lost to taxes before it reaches your heirs.

How Federal Gift and Estate Tax Is Calculated

The federal gift and estate tax is applied to the total value of taxable gifts made during your lifetime combined with the value of your estate at the time of death. Imagine that you gave gifts worth $5 million over the course of your lifetime, and you owned $15 millions in assets at the time you died. Your estate could lose $8 million to taxation if you don’t make adjustments. This would reduce what your beneficiaries receive. The Lifetime Exemption can reduce tax liability. The American Taxpayer Relief Act of 2012 set this exemption at $5 million. It is adjusted annually for inflation. Recent tax law changes temporarily increased the exemption. In 2025, the lifetime exclusion amount for individuals is $13,99 million and $27,98 million for married couples. This means an individual can transfer as much as $13,99 million without being subjected to federal gift or estate tax. Assets above this threshold will be taxed 40 percent. The high exemption amounts will only last until 2026, when they will revert back to the pre-2018 levels. This means that unless Congress enacts new legislation, the exemption could be reduced significantly, making estate tax planning even more critical.

The Role of the Annual Exclusion in Estate Planning

While the lifetime exemption provides significant relief, there are additional ways to reduce your taxable estate further. The annual gift tax exemption is one of the most effective strategies. It allows you to transfer wealth every year without it affecting your lifetime exemption. In 2025, an individual can gift up to $19,000 tax-free per recipient. Married couples can combine their exclusions to allow them to give up $38,000 per recipient every year without gift taxes. This rule does not limit the number of recipients who can receive tax free gifts. This exclusion can be used to reduce your taxable estate gradually over time. Consider the following example:

You and your spouse have four children and four grandchildren.

Each year, you both gift the maximum annual exclusion amount to each of them.

In 2025, this means you give $38,000 per recipient, tax-free.

With eight beneficiaries, you transfer $304,000 per year out of your estate without reducing your lifetime exemption.

• Over a period of 10 years, you will have transferred $3.04 million tax-free.
• This strategy can substantially lower your estate’s taxable value, reducing the amount subject to the 40 percent estate tax rate. Join us for a FREE seminar to learn more about how we can help you incorporate the annual exclusion into your estate plan. Contact an Indianapolis estate planning attorney for help incorporating the annual exemption into your estate plan. Call
• Frank & Kraft
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• (317) 684-500

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