End-of-Year Gifting Considerations
Matthew F. Hafen
December 7, 2016
‘Tis the season for giving. The best gifts are motivated by love and affection. But for some more affluent individuals, some substantial gifts can be motivated by estate, tax, family, business, or asset protection planning. Regardless of the motivation for a gift, there are a few important tips to keep in mind for those making significant end-of-year gifts this holiday season.
Basic Gift Tax Rules
The IRS will only put up with a certain amount of gifting before they make you pay for it. Let’s just call them “The Grinch” – the creepy Grinch played by Jim Carrey in the 2000 feature film, not the endearing Grinch illustrated by Dr. Seuss. Currently, you are allowed to gift up to $14,000 per year ($28,000 for a married couple) to any individual without incurring federal gift taxes. Any gift above that amount, unless there is an applicable exclusion, will be taxed at rates of 18% to 40%. But there are ways to avoid paying gift taxes with proper planning.
If you have been eyeing that new, shiny car each time you pass the car lot, December is a good time of year to kindly remind your spouse that the tax code allows unlimited gifts to a U.S. citizen spouse without incurring any federal gift tax.
If you have college-aged children or grandchildren, the tax code allows you to pay their tuition directly to the education institution without incurring any gift tax. In addition, if your children or grandchildren are too young to attend college, you can gift up to $70,000 ($140,000 for a married couple) to a 529 plan without incurring any gift tax, which can be invested and grow tax free and can be used by the beneficiary for eligible education expenses in the future.
There is also an exclusion for paying medical care or medical insurance costs on behalf of someone else if the payments are made directly to the company providing the care or insurance. Medical insurance can easily top $14,000 per year, so for affluent families that would like to assist their children or grandchildren, this can be a great way to do so without incurring federal gift taxes.
If you would like to make a substantial gift but are concerned about the tax implications, you should consider using your lifetime exemption to avoid gift taxes. Every individual has a lifetime exemption ($5.45 million per spouse in 2016) that can be used during your lifetime and at your death to transfer assets estate and gift tax free. You can do so by simply filing a gift tax return with the IRS notifying them that the value of your gift above the annual exclusion is being applied against your lifetime exemption.
Before making a significant gift, however, you should discuss the pros and cons with your legal and tax advisors. In particular, you should consider the income tax impact of lifetime gifting. Under U.S. tax law, if you gift an asset, the recipient takes your income tax basis in the property, but if you hold the asset until your death, the recipient receives the property with an income tax basis equal to the fair market value of the property at your death. So you want to choose wisely which assets you choose to gift, and which assets you choose to hold and transfer at your death.
Additional Gifting Strategies
Some families have a need to structure more sophisticated gifting strategies in order to move assets to the next generation without incurring estate or gift tax liabilities. These strategies include, among other things, the following:
Gifting ownership in a family limited partnership or limited liability company may allow you to apply a valuation discount on the assets being transferred due to the lack of marketability and the lack of control of the ownership interest being transferred. This allows you to effectively gift more at a lower valuation. It is important to note that the IRS has proposed regulations that would limit the ability to apply valuation discounts to inter-family gifts, but it is currently unclear whether the regulations will become final.
Gifting to Trusts
Setting up trusts for your children or grandchildren and gifting assets to these trusts allows you to dictate the authorized uses and amounts that can be accessed by your children or grandchildren. You can customize the trusts so that your goals are accomplished even after you have given up ownership of the gifted assets.
When planning a significant gift, it is important to consult with qualified legal and tax advisors to ensure that the gift is planned and documented properly to avoid potential problems down the road. If you would like to discuss these or other legal issues related to your estate, contact me for a consultation at (435) 674-0400 or email me at firstname.lastname@example.org.