Gifting money before death can be a wise estate planning move.
Money and taxes cannot be separated.
When purchasing and selling, taxes are usually in the mix.
With estate taxes, the government tries to take a cut of your money postmortem.
Although the current federal estate and gift tax exemption is $11.7 million per person in 2022, this will revert to about $6.2 million adjusted for inflation in 2026.
If the current administration gets its way, the exemption may revert sooner and taxes may impact more people.
According to a recent The Press-Enterprise article titled “Gift money now, before estate tax laws sunset in 2025,” gifting money can be a helpful strategy for reducing estate tax liability if done properly.
What should you consider when making gifts?
The annual gift tax exemption.
You can make a gift of $15,000 each year to another person.
If you are married and filing jointly, your gift to the same person can double to $30,000.
By staying within these parameters, this gifting of money is not subject to a gift tax.
As previously mentioned, there is also a lifetime gift and estate tax exemption.
With no legislative changes, the exemption will increase to $12,060,000 in 2022 to account for inflation.
Although singles with a less than $6 million net worth and married couples with less than $12 million in net worth will likely still be exempt from federal estate taxes under the present exemptions, there are still state estate taxes.
Although some states adopt the same threshold as the federal government, other states set their exemption limits far lower.
Planning for the possible lowering of these limits is essential to proper tax planning.
Consider this hypothetical example to demonstrate how gifting money can benefit tax planning.
A couple as a net worth of $30 million.
If both die after 2025, they will only have $12 million exempt as a couple.
This means their taxable estate is $18 million.
With a 40 percent tax rate, $7.2 million would be “inherited” by the IRS.
If the couple had leveraged gifting $23.4 million during the former exemption limit, the taxable estate would be $6.6 million.
At the same tax rate, their estate would owe the government only $2,520,000 even if they died in a year with a lower limit than when they gave the money.
By doing so, they would save about 5 million in estate taxes.
Besides gifting money outright, what options are available for transferring funds?
One could choose to gift assets through transfer into an entity like a limited liability company or a limited partnership.
By gifting a minority interest in the entity, this amount is usually provided a “discounted” value.
There is often a lack of marketability and control to these assets.
Grantor Retained Annuity Trusts.
By gifting money through a transfer to the trust, the donor keeps the rights to payment for a specified time period.
Income taxes on earnings in the trust will be paid by the donor.
Through this tool, one has the means of transferring assets tax-free.
Intentionally Defective Grantor Trusts.
A donor must create a trust then gift some assets and sell others to the trust in exchange of a promissory note.
When properly executed, several things are accomplished.
There are no gains on the sale for the purpose of taxes, the gift is minimal, and the next generation handles the appreciation while the donor pays the income tax.
Although gifting money through these methods can be helpful options now, Congress may choose to make legislation to nullify them to generate more income for the government.
Working with an experienced estate planning attorney when giving money can help you take actions to benefit you and your loved ones.
Reference: The Press-Enterprise (Nov. 7, 2021) “Gift money now, before estate tax laws sunset in 2025”