The Role of Gifts in Estate Planning

Estate planning lawyers have a broad range of tools available to help individuals plan their legacies. Many of those tools (like most estate planning documents) are revocable—they can be changed at any time. But some of those tools require irrevocable actions, and this post is about one such tool: Making gifts during life.

Often, gifting strategies are considered a tool for the very wealthy—those Americans who realistically must be concerned about the estate tax. (Remember that, for 2018, the first $11.2 million is estate value can be passed estate-tax free.)

But you don’t have to be especially rich before you need to be concerned with the gift tax, because the filing threshold is much lower than that, and filing a gift tax return means paying an accountant to prepare it (and may require paying an appraiser to value the gifted property or a lawyer to argue with the IRS over its value).

Of course, you won’t need to file a gift-tax return for a $20 birthday gift to your grandson, but you might if you give him, say, a brand new car. With that in mind, let’s look at the filing threshold for the gift tax and what kinds of gifting strategies could be part of your estate plan.

Gift Tax Filing Threshold

If your gifts during any year exceed the annual exclusion (see below), then you will have to file a gift-tax return (Form 709). That’s true even if your gifts are not taxable because you haven’t used up your $11.2 million lifetime exemption (which is shared between the gift tax and estate tax.) You file the return so that the IRS knows that you have used up some of that exemption.

Potential Gifting Strategies

For this article, I’m going to break down gifting strategies into three categories: Annual exclusion gifting, other non-taxable gifting, and taxable gifting.

Annual Exclusion Gifting

The gift tax provides an annual exclusion on a per-donor, per-donee basis. For 2018, that exclusion is $15,000. In other words, you can give any one person up to $15,000 per year gift-tax free, and without having to file a gift-tax return. (In fact, if you were rich enough, you could give every person up to $15,000 per year gift-tax free!)

This exclusion more than covers the types of gifts that most people will give during any year, but it can also be useful for wealthier Americans. For example, someone with a small business worth hundreds of thousands or even millions of dollars could give it away to his or her children a little bit at a time, taking advantage of the power of discounts in doing so.

Other Non-Taxable Gifting

The gift tax also provides deductions for gifts given to certain types of recipients. For example, gifts given to a spouse are gift-tax free (although that’s subject to limitation for foreigners with a non-U.S.-citizen spouse).

Gifts to charities are also not taxed, but the charities must be recognized by the IRS for the purposes of the gift tax. Just because a charity is recognized by the IRS for a deduction under the income tax doesn’t mean it qualifies as a charity under the gift tax. You need to check.

Also, some types of gifts are non-taxable. For example, payments made directly to a provider for another person’s education or medical expenses may be excluded from taxation.

Taxable Gifting Strategies

Finally, we come to the one that might sound a little odd at first: making taxable gifts. That’s right! In certain circumstances, it may be to your advantage to make gifts now even if they would exceed your lifetime exemption and so be taxed. This can remove those assets (not to mention the tax itself) from your taxable estate when you die.

These strategies make the most sense when it comes to assets that you expect to appreciate dramatically over time. For example, a life insurance policy has a relatively low value today, but that value skyrockets when you die. A business that you expect to appreciate is also a good candidate for this kind of giving.

Building a Strong Gifting Strategy

Recognizing that gifting can be an important estate-planning tool is the first step to using it as a tool effectively. Unfortunately, this article can only give a very general overview of what those strategies involve. If you’d like to explore this tool in more detail, please contact me today for a consultation.

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