Gifting is part of many estate plans, but what and when to gift requires thoughtful planning.
Known as the “basic exclusion,” in 2014 the IRA increased the limit of allowable tax-free transfers during life or upon death. In 2017, the state and gift tax exemption will be $5.49 million per person. You can give away up to $14,000 per person per year to as many people as you want without using up your basic exclusion, and that can take the form of cash or any other asset. There are some details you’ll need to know.
A recent article in FEDweek, “Gifts to Children Require Careful Planning,” explains that the lifetime gift tax exclusion, or “lifetime exemption,” and the estate tax exclusion are expressed as a total amount. You can use the basic exclusion—otherwise called the “unified credit”—to transfer assets at either stage or a combination of the two. But if you go over the limit, you or your heirs will be liable for a tax of up to 40%.
The IRS expects you to keep track and report these gifts, so it will know how much has already been used up when you pass away. Here’s one recommended sequence for making the gifts.
- Life Insurance Policy. If you pass away owning an insurance policy that’s payable to a person other than your spouse, the proceeds will be included in your taxable estate. Even if the proceeds go to your spouse, they’ll be added to her taxable estate. An alternative is to give the policy to your grown children or to a trust. Because of the way in which insurance policies are valued, you’ll likely owe little or no gift tax. Three years after the transfer, the policy will be excluded from your estate. If your policy has substantial cash value and giving it away would generate estate tax, you can borrow as much as you can from the policy to decrease its value, before giving it away.
- Discountable Gifts. Interests in real estate or in a closely-held business may be eligible for valuation discounts.
- Cash. There’ll be no valuation issues or deferred tax consequences with cash gifts. Simple is sometimes a better option.
- Appreciated Securities. Any assets given away will keep their basis. As a result, the recipients will owe capital gains tax if they sell the assets, but this is likely not to be a large tax. Assets that have had a modest appreciation may be optimal to give away. This is also true with assets such as a family vacation home that the recipients aren’t likely to sell.
Your estate planning attorney will be able give you guidance so that your gifting maximizes any economic advantages to your family and your estate. Also, keep in mind the impact that your gifts may have on recipients. It may be better for some recipients to receive assets in a more controlled fashion, particularly if there are problems with money management, drug use or a shaky marriage.
Reference: FEDweek (December 15, 2016) “Gifts to Children Require Careful Planning”