Lifetime Gifting Considerations

Lifetime Gifting Considerations

Recent increases in the estate tax exemption ($11.7 million per person, indexed for inflation) have allowed many estates to avoid federal estate transfer taxes. Nonetheless, executing gifts during one’s lifetime is still a wise and effective method for transferring ownership of one’s bounty to other individuals or entities. The logic here is for someone to give away property while living and, in doing so, reduce their taxable estate. There can also be non-monetary reasons for gifting, such as the donor reaping the pleasure of seeing the recipient enjoy the gift, and providing for the support, education and welfare of a donee. In addition, planning for change can also be prudent, as the estate tax regime in this country has always been a “political football”. It has been frequently changed at the whims of the politicians in power and the Biden administration has already made several proposals to lower the exemption amount. Even without legislative action, the current threshold is slated to “sunset” in 2026 back to the $5 million (adjusted for inflation) amount that was in effect prior to 2018. Because of this uncertainty, knowledge of the rules related to lifetime gifts can be beneficial.

Several forms of gifts can be made in unlimited amounts with no tax consequences. For instance, spouses are permitted to gift unlimited amounts to each other. There is also an exclusion granted in IRC section 2503(e) that allows for the payment of tuition (but not room and board, or books) directly to an educational institution. Thus, grandparents can pay directly for a grandchild’s tuition without being concerned about Gift Tax or Generation Skipping Tax levies. In addition, medical expenses paid directly to the provider for someone’s care will receive similar treatment. All other gifts are limited by the unified rules governing gift and estate taxes.

These rules limit gifts to $15,000 (indexed for inflation) annually from one individual to another. However, the donor is permitted to gift this amount to as many other individuals annually as they choose. If the donor is married, their spouse can consent to “gift-splitting” by which a total of $30,000 can now be given to any or all of the same individuals. Annual gifts exceeding these limits require the completion of a Gift Tax return (Form 709) and will reduce the individual’s unified credit amount. This unified credit amount is an offset for some estate taxes. It is entered by the executor on the deceased person’s Estate Tax Return (Form 706).   

If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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