After the election, many people are wondering what will happen to the federal gift and estate tax exemption. Kiplinger’s recent article entitled “Making a Gift This Year? Some Key Questions to Consider,” explains that the Tax Cuts and Jobs Act dramatically upped the lifetime gift, estate and generation-skipping tax exemption to $11.58 million per individual ($23.16 million per couple). This exemption, however, is set to expire at the end of 2025. Some observers say that Democrats could significantly shorten the time frame, ending it as early as 2021.
Some families may face the possibility of losing an opportunity to transfer wealth out of their estate and save on future estate taxes sooner than anticipated. No matter when the gift is made, here are some important issues to consider.
Can I afford to give? For couples who have a significant taxable estate, gifting assets and removing future appreciation could result in some substantial tax savings for their heirs. However, just because someone has the means to make a large gift, doesn’t necessarily mean it’s the right move. Some are so eager to take advantage of the tax benefits that they underestimate their own cost of living down the road. Look at whether the grantor has enough assets to maintain their desired lifestyle. Then, think about what can be transferred without negatively impacting goals and lifestyle choices.
How Do I Structure a Gift? There are many ways of distributing assets. Remember that any transfer is gift tax-free up to the annual exclusion amount ($15,000 per person per donor for 2020). Any gift over this will count against the donor’s lifetime exemption amount. Once that’s exhausted, the gift will be subject to gift tax.
Outright Cash Gifts. This may be the most uncomplicated way of gifting, but for families with significant wealth, this could have some drawbacks. Some recipients may not be prepared to manage money, and it may demotivate them to live off their inheritance rather than becoming productive on their own.
Trusts. These are frequently used for bigger gifts to provide for beneficiaries, while using some restrictions by the grantor to protect the assets from being squandered. One plan is to distribute the trust assets in stages, when the beneficiary reaches a certain age or achieves a specific goal. Another option is to leave assets in a discretionary lifetime trust, which would maintain the assets in a trust for the beneficiary’s entire lifetime. Drafted properly by an experienced estate planning attorney, this offers a high level of protection from divorcing spouses, lawsuits, bad decisions and outside influences. It also lets grantors create a lasting family legacy for many generations.
Gifts for Education Expenses. You can also make direct payments for education or for medical expenses with no gift tax consequences.
Uniform Trust to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). These custodial accounts are usually less restrictive than trusts and allow minor beneficiaries access to funds at age a specific age, depending on state law.
Reference: Kiplinger (Oct. 30, 2020) “Making a Gift This Year? Some Key Questions to Consider”