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The Holidays: Lifetime Gifts And Estate Planning

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With the holidays around the corner, many people are considering making gifts to their loved ones. Lifetime gifts can be a substantial and important part of an estate plan, allowing people to transfer wealth to others. However, many people will also want to minimize the tax effect of making such transfers so that their wealth passes to loved ones, not the government. Baxter Legal Services can assist with matters involving lifetime gifts and estate planning. You can arrange a confidential consultation by calling our experienced legal team today at (425) 686-0574

 

Lifetime Gifts and Federal Taxes

Under the current tax law, a person can make a gift to another person up to $15,000 in a single year without having to prepare a gift tax return or pay gift tax on the transfer, according to the Internal Revenue Service (IRS). In fact, the person can make as many $15,000 transfers as they want to different people without incurring the federal gift tax. For a couple, the annual gift tax exclusion amount is $30,000 per year per recipient of each gift. 

The only caveat is that the total of all transfers cannot exceed the federal estate tax exclusion limit. Thanks to the Tax Cuts and Jobs Act, the federal estate tax exclusion is a healthy $11.7 million per person or $23.4 million per married couple. This amount is adjusted each year for inflation under the current tax law. If the person dies with an estate that exceeds the federal estate tax exclusion amount, any amount over the exclusion limit is subject to 40% tax. If a person gives more than $15,000 to another person in a single year, they are required to report it on the IRS’ gift tax form and the gift will be subject to the gift tax.

 

How Lifetime Gifts Affect Estate Planning

Gifting has long been a strategy employed by the wealthy to transfer wealth to the next generation. Gifting ultimately reduces estate taxes by decreasing the value of the estate. The appreciation of assets is also removed from the estate by a completed gift. The less value in the estate at the time of death, the lower the tax bill. 

Here is how a lifetime gift can look as an example: 

Grandfather has an estate that is currently valued at $20 million. He begins using a gifting strategy in which he transfers $1 million of his wealth over the next 10 years to his relatives, friends, and other beneficiaries. After 10 years, his estate is now valued at $10 million, so it is not subject to the estate tax. Compare that result with one in which he does not use gifting and dies with an estate valued at $20 million. $8.3 million ($20m - $11.7m exemption) of the estate will be subject to the 40-percent tax, or $3.32 million in this example. 

The $11.7 million exemption applies to the combined amount of gifts and estate taxes, so whatever exemption you use for gifting will reduce the amount available to use for the estate tax. For example, if you use $700,000 for gifting, you can only exclude $11 million for the estate tax. 

 

Benefits of Lifetime Gifts and Estate Planning

As explained above, the major benefit of making lifetime gifts is that it reduces the value of your taxable estate. Other potential benefits of lifetime gifts include:

  • The appreciation of the gift does not count against the person making the gift
  • The recipient can use the gift now instead of waiting until after the donor’s death
  • The donor can begin transferring wealth now while the exemption amount is higher than it might be in the future

 

Concerns for Lifetime Gifts and Estate Planning

A gifting strategy does not come without concerns. Some of the common concerns surrounding lifetime gifts and estate planning include:

  • Once the gift is given, the donor loses control over it. This can leave them vulnerable if they do not have enough to live on in their older years. 
  • The current tax law is set to expire in 2025, so the amount of the exemption may revert back to $5.49 million, adjusted for inflation. This could mean that many larger estates may still be subject to estate tax if their estates are valued at more than this amount when they pass away. 
  • The exemption amount only applies to federal estate taxes. The estate may still be subject to estate taxes. In Washington for estates in 2021, the state estate tax exemption amount is much lower, at $2,193,000, according to Washington State’s Department of Revenue.

An experienced estate planning attorney from Baxter Legal Services can discuss your individual needs and concerns to create a plan that addresses them. 

Strategic Gifting

Large family celebrating Christmas

To minimize gift and estate taxes, many people may consider a gift strategy. This strategy will reduce the tax liability by making gifts at opportune times, such as before the end of the year to maximize each annual gift and before the expiration of the Tax Cuts and Jobs Act. Additionally, the strategy may prioritize gifting certain assets, such as:

Assets Expected to Appreciate in Value Soon 

If an asset is expected to appreciate in value soon, it makes sense to gift it now so that you can avoid the appreciated value from becoming part of your taxable estate at death. 

Family Business Interests

Because of the potential financial issues involved with transferring a family business to another family member, family business interests may be transferred through annual gifts. This type of transfer may also be eligible for valuation discounts. 

Assets Subject to Valuation Discounts 

In some situations, an asset is subject to a valuation discount. For example, there may be a lack of marketability for the asset. In these situations, the asset may be transferred with a valuation discount. For example, a $100,000 business interest with a 20% valuation discount would only transfer at $80,000. This allows a person to transfer more assets than they would simply by transferring assets without such valuation discounts.

Educational and Medical Expenses

According to the IRS, payments for qualified educational expenses (like tuition) that are made directly to the educational institution and payments for medical care paid to the provider are excluded from taxable gifts. Therefore, a person wanting to make a difference in a loved one’s life without incurring additional tax liability could make these types of payments.

 

An Estate Planning Lawyer Can Help

If you are considering making lifetime gifts part of your estate planning strategy, Baxter Legal Services can help. Our knowledgeable lawyers can explain the best time to give, how much to give, the types of gifts that will make the biggest impact, and ways to reduce tax liability. Call us at(425) 686-0574 to learn more.