Gifting as an Estate Planning Tool – Is it Right For Me?

Hook Law News | Sep 14, 2020 | Rachel H. Snead

For many people, passing on money and property to their loved ones happens after they die. However, if you have a sizeable estate you may not want to wait until then to give your heirs their inheritance. Under the current federal law, individual estates valued above $10 million or $20 million per couple are subject to a 40 percent federal estate tax at the top rate. Strategic lifetime or inter vivos gifting can reduce the size of your taxable estate before your death, and help your beneficiaries avoid this hefty financial burden.

Giving money and assets to your loved ones during your lifetime rather than having them wait until after your death to collect, is defined as lifetime giving. It is an estate planning strategy used to reduce estate taxes by spreading gifts throughout your lifetime using certain exemptions created by the federal gift tax laws. Qualified gifting is the complete and irrevocable transfer of assets from one person to another, where the giver does not receive anything in return. Certain IRS exemptions allow you to make these gifts completely tax-free, provided their values fall within the federally allowed limits. Going above these allowable amounts means that you, as the giver, are obligated to report the gift to the IRS and pay a federal gift tax.

If you plan to use gifting as an estate planning tool, you’ll want to plan out your giving and time it properly, so you and your loved ones can avoid as much estate related taxation as possible. Here is the basic overview of annual and lifetime giving exemptions.

Annual Gift Tax Exclusion

In 2020, the first $15,000 in gifts made by a donor to any one person during the calendar year is not taxable. One $15,000 exclusion per donee per year is allowed to an unlimited number of donees. The number of exclusions is not determined by the number of gifts, but by the number of donees. This means that if you have three children and give each of them $15,000 this year (or $30,000, if you are married and you and your spouse “split” the gift) you do not need to pay a gift tax. However, if you give one child $16,000 in a single year, $1,000 of that is considered taxable, and counts against your allowable lifetime gift amount. By the same token, the recipient does not have to report annual gifts under $15,000 as income, but they must report any income or interest earned directly from that gift.

Lifetime Gift Tax Exclusion

Individuals may reduce their estates and save estate taxes by making transfers of present interests gift-tax-free under $15,000 (for 2020 and indexed annually for inflation) per donee each year. The lifetime gift tax exemption is connected to the estate tax exemption: the roughly $10 million limit is the combined amount that you can give away prior to death and leave to others after death, without being subject to federal taxes. This means that if you give away $5 million in non-exempt gifts while you’re alive, only $5 million of your remaining estate is tax-exempt, and your estate must pay taxes on anything beyond that amount. If you are married at the time of your death, your surviving spouse is entitled to their own individual exemption plus any of your unused exemption, if you properly invoke portability in your estate plans.

Exceptions to the Rules

  • Marital gifts. If both spouses are U.S. citizens, they can make unlimited lifetime gifts to one another without paying taxes on those gifts.
  • Medical and Educational Gifts. Payments made directly towards a dependent-beneficiary’s medical services or education (i.e. tuition) is not included in your lifetime gifting amount.
  • Charitable gifts. You do not have to pay taxes on gifts given to qualifying organizations like charities, religious or educational institutions, government agencies, and 501(c)(3) organizations.

Potential Benefits of Gifting Now

  1. The post gift appreciation on the gifted assets escapes transfer taxation upon the donor’s death.
  2. The donor can use the gift event as a way to pass on experience and wisdom to increase the recipient’s financial acumen and experience; and
  3. The recipient can benefit from the gift now rather than in the future when the donor dies.

Potential Disadvantages of Gifting Now

  1. The donor’s loss of control over the transferred assets;
  2. The donor’s loss of access to the gifted asset and its income; and
  3. Loss of the date-of-death tax cost basis adjustment to the fair market value that would otherwise be available upon the donor’s death.

Determining whether to make substantial gifts to future generations is a complex decision and is dependent upon a number of factors. A discussion with your tax, legal and financial advisors can help you decide what is right for you and your family. The exclusion amounts currently available for the federal gift and estate tax and generation-skipping transfer tax may prove to be a once-in-a-lifetime opportunity to pass wealth to children, grandchildren, and more distant generations in a tax efficient manner. Yet lifetime gifting is a balancing act where the benefits of making gifts today should outweigh the potential disadvantages. Be sure to discuss these recommendations with your legal and tax advisors before making any major decisions.

Rachel H. Snead

Associate Attorney
757-399-7506 | 252-722-2890
[email protected]

Rachel Snead is an associate attorney with Hook Law practicing primarily in the areas of estate planning, estate and trust administration, guardianship and conservatorships, dispute resolution, and fiduciary litigation. To date, she has litigated and settled over 50 matters. She enjoys the diversity of work that elder law provides, and the challenges presented by litigation just as much as she enjoys helping people with creating their unique estate plan and navigating the complex administration of estates and trusts.

 A graduate of the University of Richmond School of Law and Virginia Commonwealth University, Rachel is admitted to the Virginia State Bar. She is also a member of the Virginia Bar Association (VBA), the Hampton Roads Estate Planning Council, the Virginia Academy of Elder Law Attorneys (VAELA), and the Virginia Trial Lawyers Association (VTLA).

In 2022 she became a licensed health and life insurance agent and attended the prestigious National Trial Advocacy College at the University of Virginia School of Law where she received intensive hands-on advocacy training.

 She has taught multiple continuing legal education courses including, “Getting Started in Elder Law,” “Virginia Probate from Start to Finish,” and “Guardianships and Assisted Decision-Making in Virginia,” and has facilitated sessions for VAELA including “Medicaid & SSI When a Client Owns a Business.” She has also been published on various platforms including T & E Magazine, and Age in Action, a quarterly newsletter published by the Virginia Center on Aging and Virginia Department for Aging and Rehabilitative Services.

Practice Areas

  • Estate Planning
  • Estate & Trust Administration
  • Guardianships & Conservatorships
  • Litigation & Dispute Resolution
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