Strategic Gift Giving: A Smart Approach to Estate Tax Reduction

At Wilson & Wilson Estate Planning and Elder Law LLC, we understand that tax-efficient wealth transfer is a priority for many of our clients. Fortunately, only a small percentage of Americans will face federal estate tax concerns. This is because the exemption is worth several million dollars. Consequently, you can bequeath or donate up to this amount without incurring federal taxes. Moreover, this exemption is adjusted annually for inflation, and married couples have the advantage of doubling that exemption amount. Nevertheless, some states may levy estate taxes on smaller estates.

Even if estate tax liability isn't a pressing issue for you, proactive gifting can provide immediate joy and significant financial relief to your loved ones during your life. The IRS allows you to give tax-free gifts up to a certain amount per recipient per year. To capitalize on these potential tax savings, it's crucial to ensure that no single beneficiary receives more than this stated amount within a calendar year.

The annual exclusion for gifts offers a simple and effective way to manage gift taxes. If your generosity exceeds the ceiling to any one person in a given year, you'll only need to pay gift tax on the amount that surpasses the threshold—which, importantly, keeps up with inflation.

Spouses have the opportunity to pool their annual exclusions, allowing them to double the tax-free gift per recipient each year. Under the federal tax code (§ 2513), a gift from one spouse can be treated as a gift from both, provided there is mutual consent.

Example:
Consider Joe and Faye, a couple in their golden years, who wish to gift their son and his spouse funds for a home down payment. By each using their exemptions, they collectively gift double the ceiling to their son and the same amount to his wife, without incurring any gift tax. When the new year arrives, they're eligible to give the same total amount again tax-free.

Gifts to a spouse who is a U.S. citizen are exempt from tax. For non-citizen spouses, a tax-free limit applies (as per Internal Revenue Code § 2523(a)). However, it is wise to consider the tax implications when transferring substantial assets to a spouse, as this could result in a sizeable taxed estate upon their passing.

To fully utilize your annual exemption, it's essential to remember that it's based on the calendar year; missed exemptions from prior years cannot be reclaimed. Carefully timed gifting can sometimes avert gift tax obligations. For example, by dividing a gift into two parts, you might be able to ensure the gift remains tax-free.

You can also stagger gifts of non-cash assets, such as stocks or real estate, over several years.

Example:
Solomon and Rhoda wish to gift their vacation cabin, valued at $75,000, to their son Gerard. They transfer half the cabin in November, thereby utilizing their combined annual exclusion for a tax-free transfer. The following year, Rhoda gifts her remaining half, also considered tax-free.

When gifting to underage children, proper management of the property is key. Options include setting up an irrevocable child's trust or a state-law-authorized custodianship. To comply with the annual exclusion guidelines, the minor must fully receive the property by age 21, unless the recipient wishes to extend the trust, and in the event of their premature death, the property must be transferred to their estate or a designated individual.

Planning a substantial gift-giving strategy may not align with everyone's financial comfort or the readiness of their beneficiaries to manage such generosity. However, for those whose circumstances permit, the benefits of assisting loved ones at pivotal life stages can be profoundly rewarding.

Increased life expectancies have prompted many to reevaluate the timing of wealth transfers. It's worth considering whether your financial assistance might be more impactful during your beneficiaries' younger years rather than delaying inheritances until later in life.

At Wilson & Wilson Estate Planning and Elder Law LLC, we are here to help you navigate the complexities of estate planning and execute a strategic gifting plan that benefits you and your loved ones. Contact us today at (708) 482-7090 for a complimentary consultation.