With the gift and estate tax exemption reaching $5.49 million this year, it may seem that gifting assets to loved ones is less important than it was in previous years during estate planning. However, lifetime gifts continue to provide significant benefits, whether your estate is taxable or not. Plus, pending legislation in Congress may help alleviate some of the estate tax burden.
Let’s examine three reasons why making gifts remains an important part of estate planning:
1. Lifetime gifts reduce estate taxes. If your estate exceeds the exemption amount — or you believe it will in the future — regular lifetime gifts can substantially reduce your estate tax bill. Assume that your estate is worth $7.49 million. Based on today’s federal estate tax rate, your estate tax liability would be $800,000 (40 percent × $2 million). You can reduce the size of your taxable estate by starting a gifting program.
The annual gift tax exclusion allows you to give away up to $14,000 per recipient ($28,000 if you “split” gifts with your spouse) tax-free. In addition, direct payments of tuition or medical expenses on behalf of your loved ones are excluded. Let’s say you’re married with four children and eight grandchildren, and that at any given time over the next six years four of your grandchildren are in college. You and your spouse give each child and grandchild $28,000 per year and make direct tuition payments of $20,000 per year for the grandchildren in college. In six years, you’ll have reduced your taxable estate by nearly $2.5 million.
Taxable gifts — that is, gifts beyond the annual exemption amount — can also reduce your estate tax liability by removing future appreciation from your taxable estate. You may be better off paying gift tax on an asset’s current value rather than estate tax on its appreciated value down the road. When gifting appreciable assets, however, be sure to consider the potential income tax implications. Property transferred at death receives a “stepped-up basis” equal to its date-of-death fair market value, which means the recipient can turn around and sell the property free of capital gains taxes. Property transferred during life retains your tax basis, so it’s important to weigh the estate tax savings against the potential income tax costs.
2. Tax laws aren’t permanent. Even if your estate is within the exemption amount, it pays to make regular gifts. The 2012 tax law made the $5 million exemption (indexed for inflation) “permanent.” But that doesn’t mean lawmakers can’t increase or reduce the amount in the near future. In fact, the current Senate plan retains the current federal estate tax of 40 percent, but increases the basic exclusion to $10 million for individuals, subject to inflation adjustments. The House GOP bill calls for doubling the current federal estate tax exemption of $5,490,000, until 2023.
3. Gifts provide non-tax benefits. Tax planning aside, there are many other reasons to make lifetime gifts. Perhaps you want the chance to see your children or grandchildren enjoy your wealth. Or perhaps you wish to use gifting to shape your family members’ behavior — by providing gifts to those who attend college, for example. If you own a business, gifts of interests in the business may be a key component of your ownership and management succession plan.
Regardless of the amount of your wealth, consider a program of regular lifetime giving. If your estate is large enough to be taxable — or if Congress changes the exemption in the future — gifting can soften the blow of estate taxes. And even if estate taxes never become a concern, gifting provides significant nontax benefits for loved ones.
For more information or to obtain estate planning assistance, contact Doeren Mayhew’s tax advisors today.
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