Estate planning and gift-giving taxes and strategies

An estate plan is an integral part of the financial planning process. It is conceived to carry out your wishes upon death.

Some folks choose DIY, or do-it-yourself wills or trusts. Ultimately, it is your choice, but given the complexity of estate planning, we strongly recommend that you seek guidance from an attorney.

An attorney that specializes in estate planning can lead you through the process and draw up plans that will establish the appropriate strategy for you.

As a part of the process, we will discuss gift taxes and gift giving. Estate planning and gift taxrules are complicated, and this will be a high-level overview. Please consider consulting your attorney or tax advisor for any questions.

Under the current law, the lifetime exemption for gift and estate taxes last year was $11.7 million for individuals and $23.4 million per married couple. For 2022, the thresholds rise to $12.06 million per person and $24.12 million per couple.

The annual gift-tax exemption in 2022 is $16,000 per donor, per recipient, up from $15,000 last year. The recipient may be your child, relative or a stranger.

This means that a giver can give someone a gift that is valued up to $16,000 in a calendar year, and the giver will pay no federal gift taxes. If the gift comes from a couple, the limit doubles to $32,000. Even then, if you exceed the thresholds, it’s unlikely you will owe federal taxes on your gift, as we’ll explain in a moment.

Please note that in 2019, the IRS clarified that individuals taking advantage of the increased gift tax exclusion in effect from 2018 to 2025 will not be adversely impacted after 2025, when the exclusion amount is scheduled to drop to pre-2018 levels.

Because it is a gift, the recipient owes no federal income tax. However, the giver will not receive a tax deduction for the gift. Gifts to a qualified charity may be tax-deductible and are not subject to gift tax limits.

What if your gift exceeds the prescribed limit? Do you, the giver, owe a gift tax? The short answer is probably not.

You see, the annual limit is also applied to the lifetime exemption of $12.06 million per person and $24.12 million for a couple (for 2022).

For example, if Mom gives a $20,000 gift in 2022 to her daughter, Mom exceeds the $16,000 annual limit by $4,000. Taxes can still be avoided. However, Mom would be required to file U.S. Gift Tax (and Generation-Skipping Transfer) Form 709 with the IRS.

You may avoid the gift tax unless you top the lifetime exemption.

If you exceed the lifetime exemption, the gift tax rate ranges from 18% to 40%. Beware of exceptions and rules for calculating the tax. If you are running up against the limit, please consider talking to your tax professional.

What gifts are excluded?

• Gifts that are not more than the annual exclusion for the calendar year.
• Tuition or medical expenses you pay for someone.
• Gifts to your spouse.
• Gifts to a political organization for its use.
• Gifts to qualifying charities.

7 strategies you may utilize

1. Give extra. If you are wealthy and won’t need the assets, consider giving above the annual exclusion. While you will file a gift tax form with the IRS, you may rely on your large lifetime exemption.
2. Give assets that are appreciating, as these assets remove any future appreciation to the estate. But beware of taxes.  When received as a gift, the recipient will usually receive the cost basis of the donor. If the recipient sells, the assets will be taxed on the appreciation as a capital gain. If the gift is inherited, the tax basis will increase to the current value, potentially reducing taxes if the asset is sold. 
3. Gift assets from joint owners. This doubles the amount of the gift without running up against annual exclusion
4. Spread out the gifts over several years. Recipients get all that you want to give them, just over a longer period of time. 
5. Paying for tuition or medical expenses avoids the annual limit. But they must be paid directly to the institution, not the recipient.
6. Be careful. Speak with your attorney or tax advisor if your assets include real estate or business holdings that could generate unwanted tax liabilities without proper planning. 
7. Playing the lottery? Think ahead. Finally, on the outside chance you win the lottery and you decide to share your winnings with siblings, your generosity is commendable. But it’s probably best that you buy the ticket jointly with your siblings or have some type of partnership agreement in place before the winning ticket is purchased. If not, the gift tax could take a big bite of your windfall.

I trust you’ve found this review to be educational and insightful. If you have any questions or would like to discuss any matter, please feel free to give me a call.
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As always, thank you for the trust, confidence and the opportunity to serve as your financial advisor.