Some Basic Gifting Strategies

Cheri Franklin |

No matter what you believe about what happens to us after death, you will certainly agree that our assets will not be coming with us. The two-fold purpose of estate planning is effectiveness (directing your assets where you want them to go) and efficiency (minimizing the transfer costs such as taxes and probate). A well-planned gifting program should be at the center of a sound estate plan. Here are some strategies to accomplish the transfer of assets out of your estate in order to avoid the marginal 40% estate tax rate.

First, you can pay for a loved one’s education and healthcare expenses via a qualified transfer. Specifically, a payment made directly to an educational institution for tuition or a payment made directly to a medical care provider for qualified medical expenses is exempt from gift tax.

The next step is to use the $14,000 annual exclusion from gift tax. A qualifying gift must be of a present interest, meaning that it cannot be inaccessible to the recipient until some future date. One way to get around this restriction is to transfer assets to an irrevocable trust with a Crummey power which allows the beneficiary to withdraw funds for a set period of time (say 30 days). Gift splitting (or simply gifts of community property in community property states) allows a married couple to gift $28,000 per recipient. Regarding education funding, there is a special provision for 529 plans that allows rolling five years of gifts into a single year. This means that a married couple can give $140,000 to a grandchild’s 529 plan account.

Once you are past the annual exclusion, and you still want to give to the same recipient, then you can utilize your lifetime gift and estate tax credit amount of $5.49 million for 2017. For a married couple, it simply doubles to $10.98 million, but each partner is tracked separately. Once that is used up, for every dollar you give to a particular recipient for whom you have already used the $14,000 annual exclusion, you will owe Uncle Sam 40 cents. Where this gets particularly onerous is when you give to a grandchild or an unrelated person more than 37.5 years younger than you. At this point, the generation-skipping transfer tax (GSTT) kicks in for a whopping 96 cents for every dollar given away.

As for when to give, it is best not to wait until the last few years of life because Uncle Sam will include in a decedent’s gross estate gift taxes paid in the last three years before death. This means that the total taxes paid on a $1 million gift would be $560,000 which is equivalent to the estate taxes that would have been due on $1.4 million left in the gross estate, assuming the lifetime $5.49 million credit had been used up. Lastly, charitable gifts are not subject to any gift or estate taxes, but this is a topic we will address in a future article.