Gifting is an essential part of a comprehensive estate plan: a simple and effective way of transferring property, especially within families.
Government Incentives for Gifting
As you’re probably aware, the government makes gifting attractive. Currently, anyone may give $15,000 each to as many people per year as they wish without reporting the gifts or paying a tax, and $30,000 for a married couple. There are some basic requirements for gifts to qualify for these “annual exclusions,” but for most donors they’re easily met. On top of the annual exclusion, an individual may give away $11,700,000, ($23,400,000 for a married couple), before an estate or gift tax is paid, and unlimited amounts to qualified charities or a spouse.
In addition to the economic benefits of making a gift—reducing the donor’s gross estate value and therefore any potential estate taxes and leaving any appreciation of the gifted property outside his or her estate—gifts are emotionally satisfying to the donors and may immediately help the beneficiaries.
Gifting Comes with Questions
Donors often have reservations about making gifts: Are they financially secure enough to make a gift? How much should they give? Which assets they should use? When should they give? Is the recipient mature enough to handle the gift? Will the gift make the recipient feel “entitled” or non-recipients jealous?
Discussing these issues with an advisor often helps to provide some perspective for the donor. Above all, donors must feel comfortable in making any gift: Gifting should relieve a burden, not create one. And while it is often better to give to your loved ones while you are alive, gifting should be viewed as part of an overall estate plan covering both lifetime gifts and bequests.
Some Gift Alternatives
Examples of structures that would qualify for annual-exclusion gifts include:
- A Uniform Gift to Minors account that could be opened and accept gifts, supervised by an adult for the benefit of a minor.
- A 529 Plan for funding the costs of higher education (with contributions potentially front-loaded for extra leverage, allowing five years of annual-exclusion gifts to be made in one year).
- Specially designed trusts often qualify for the gift-tax annual exclusion, but are subject to certain conditions designed to help the beneficiaries over time. Often, they limit the control the beneficiary has over the assets.
Donors can choose to give in excess of $15,000 to a single beneficiary in a given year; those gifts need to be reported to the IRS and are subject to gift taxes, or a reduction in the donor’s lifetime exemption. Such gifts may resolve issues about real estate or art, for example, during donors’ lives, assuring them that valuable property will go to the beneficiaries of their choice.
In addition, there are “gifts” that the IRS doesn’t consider as gifts. So they don’t need to be reported and will not reduce a donor’s unified credit or count toward the annual-exclusion limit. Those “gifts,” of great value to the donor and the recipient, pay for certain medical or educational expenses, as long as they go directly to the providers and not pass through the hands of the beneficiaries.