Gifts and Gift Tax Primer
By Elizabeth Larrauri Chamulak
As we reported in late December 2017, the Tax Cuts and Jobs Act (the “Act”) made important changes to United States estate and gift tax exemptions. As of January 1, 2018, the new law more than doubled an individual’s estate and lifetime gift tax exemption to $11,180,000. This amount will increase every year to adjust for inflation. However, nothing lasts forever and on January 1, 2026, the exemption reverts back to the December 31, 2017 exemption amount ($5,490,000 per individual).
For the next eight years, very wealthy U.S. citizens and residents have a tremendous opportunity to reduce the size of their federal taxable estates through gifting. Even if their prior exemption has been “used”, each individual has an additional $5,690,000 to gift away tax-free.
Some key points to consider:
- With maximum Estate and Gift Tax Rates of 40%, there is a great benefit in consulting with our team to create new estate plans or review current plans, to maximize available tax savings.
- The Generation Skipping Transfer Tax is a flat 40% rate. For individuals who wish to provide for their grandchildren, or great-grandchildren’s futures directly, gifting to these beneficiaries during the donors’ lifetime, either outright or in trust, could be impactful in tax savings. Gifts to Uniform Transfers to Minors Act (UTMA) custodial accounts or 529 college savings plans could result in great benefit to both the donor and the donee.
- While estate and gift tax savings are worthy goals of estate planning, these are not the only purposes of an estate plan. There are non-tax benefits, such as protecting assets from creditors or spendthrifts, which can also be achieved through gifting. Preserving family wealth and legacies can also be accomplished through lifetime gifts.
- Married couples can combine their lifetime exemptions for a total amount of $22,360,000 available to gift, either outright or in trust. Gifts can be split between married individuals (gift-splitting) and the source of the gift is not a consideration in using available lifetime exemption. This is especially important if one spouse provides all the assets for the gifts but has limited exemption available.
- While very few people will turn down cash gifts, gifting assets that have the potential to grow in value (i.e. business interests, real estate, and artwork) will result in significant estate tax savings because the donor will not pay the tax on the future appreciation.
- For individuals who are reluctant to gift a portion of their wealth during their lifetime, an annual gifting program can be a major tax savings plan. As of January 1st, 2018, the gift tax annual exclusion is $15,000 per donee (gift recipient). A married couple can gift $30,000 per donee annually without impairing their lifetime exemption amount. Gift splitting is also permissible with annual exclusion gifts. The number of donees that can be gifted per year is unlimited.
- There are a few unlimited gift tax exclusions such as payments made directly on behalf of a donee’s education or medical care. Amounts paid directly to a donee’s school (for tuition only) or a donee’s medical practitioner (doctor, hospital) are not subject to gift tax and do not count toward the annual exclusion amount.
- Gift Tax Returns (Form 709) for gifts made in 2017 are due on April 17th, 2018. If an individual files an extension for their federal income tax return, it is an automatic extension on the gift tax return. If no extension for federal income tax filing is requested, a gift tax return extension request can be filed (Form 8892). It is an automatic six month extension.
- The sunset provision on January 1, 2026 has raised concerns due to the “clawback risk”. If an individual uses his or her entire exemption prior to December 31, 2025 and subsequently dies in 2026 while the exemption amount is much lower, this could result in the IRS “clawing back” what was once gifted tax free and subjecting it to estate tax. However, Congress has recognized this concern and the Department of the Treasury has been charged with issuing guidance on this issue. To date, there is no response from the DOT.
This is an important time to review your existing estate plan or consult with one of our team members to create one. The opportunity to transfer wealth and protect assets, while saving up to 40% in estate and gift taxes, is too crucial to miss.
Should you have any questions or desire further insight, feel free to contact one of the members of our Tax Department:
Mayer Nazarian, Chair of the Tax Department - email@example.com
Eli Akhavan, Chair of the Private Clients and Wealth Preservation Practice Group - firstname.lastname@example.org
Aman Badyal - email@example.com
Elizabeth Larrauri Chamulak - firstname.lastname@example.org
Elizabeth Nelson - email@example.com
Farzaneh Savoji - firstname.lastname@example.org
Gary Edelstone - email@example.com
Michael Shaff - firstname.lastname@example.org
Jon Hughes - email@example.com
Gordon Einstein - firstname.lastname@example.org
DISCLAIMER: This article is not intended to provide legal advice, and no legal or business decision should be made based on its contents.