Gifting Can Help Estate Plans and Heirs Reach Goals

Despite many attempts at repeal over the years, the modern U.S. Estate Tax has been in place since September 8, 1916. Each U.S. citizen and resident alien is entitled to a lifetime exemption from the federal Gift/Estate Tax called the Applicable Exclusion Amount.

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Gifting can help you to accomplish some of the more common goals of estate plans, but care must be taken to consider tax implications and the legal effects should be understood. Gifting can help improve family harmony because you can observe the effects of the gift and the reactions of the recipients. Did you know that Massachusetts has no state-level gift tax? Plus, the applicable federal exclusion amount for gift/estate tax purposes is $11.58 million in 2020, a level that makes incorporating gifting into estate plans attractive for affluent families. If a donor’s taxable gift one that does not qualify for the annual, medical or education exclusion is in excess of this amount, or if the value of the donor’s aggregate taxable gifts is higher than this amount, the federal gift tax will be due by April 15 of the following year. The current gift tax rate is 40%.

This presents an opportunity, as described in detail in the article The Case for Gifting Now (or At Least Planning for the Possibility from The National Law Review.

Gifting can help fund tax-advantaged legal entities, such as irrevocable trusts, family limited partnerships and family limited liability companies. However, bear in mind that there may be capital gains tax implications of a gift. Gifts of assets will carry over the cost basis for capital gains tax purposes. So, be certain that the recipient of a highly-appreciated gifts is aware that the gift brings with it the cost basis and potential capital gain if it is subsequently sold.

If the exclusion is used during one’s lifetime, it reduces the amount of the exemption available at death to shelter property from the estate tax. With proper planning, spouses may currently gift or die with assets totally as much as $23.16 million, with no gift or federal estate tax. To gain perspective on how high this exclusion is, in 2000-2001, the applicable exclusion amount was $675,000. The exclusion amount will automatically decrease to approximately $6.5 million on January 1, 2026, unless changes are made by Congress before that time to continue the current exclusion amount. Now is a good time to have a conversation with your estate planning attorney about how gifting can help in advance of the scheduled decrease and/or any changes that may occur in the future. The following are reasons why this exemption may be lowered:

  • Trillions of dollars in federal stimulus spending necessitated by the COVID-19 pandemic and the severe economic downturn in the U.S.
  • Past precedent of passing tax legislation mid-year and applying it retroactively to January 1.
  • A possible change in party control for the presidency and/or the Senate
  • The use of the budget reconciliation process to pass changes to taxes.

In the 100-plus year history of the estate tax, the exemption has never gone down. However, the exemption has also never been this high. The possibility of a compressed timeframe for family business owners and wealthy individuals to implement lifetime gifts before any legislative change may make a tidal wave of gifting transactions challenging between now and December 31, 2020. Gifting can help achieve goals that you may have otherwise postponed. Now is the time to start planning and take action to utilize the exclusion amount.

Needless to say, it is wise to consult with McManus Estate Planning, LLC and your CPA prior to making gifts.

Reference: The National Review (Aug. 20, 2020) The Case for Gifting Now (or At Least Planning for the Possibility