United States: Lifetime Gifts: An Effective Strategy For Estate Tax Planning

Last Updated: June 10 2019
Article by Katie Bickle

Gifting is a great way to help family and friends during life, but lifetime gifts can also be an important and effective strategy for estate tax planning.

The 2017 Tax Cuts and Jobs Act (the "Act") increased the federal gift and estate tax exemption from $5 million to $10 million indexed for inflation. The federal exemption is $11.4 million per person in 2019. The increase in the federal exemption does not mean that planning should be postponed or put on the back burner. The increased exemption is scheduled to sunset on January 1, 2026. In 2026, the exemption will revert to $5 million per person, indexed for inflation. With the implementation of the Act, planning is more important now than it has ever been.

There are many ways to use lifetime gifts as a strategy to minimize or eliminate potential gift and estate tax liability. The first and easiest way is to take advantage of annual exclusion gifts.

Annual Exclusion Gifts

In 2019, each person may gift up to $15,000 per donee each year free of tax and without using any of his or her gift or estate tax exemptions. An example of an annual exclusion gift would be writing a check directly to the donee/recipient. It is also important to note that a married couple can consent to split gifts and transfer a total of $30,000 per donee each year, or each spouse could individually gift $15,000 to the same donee.

There are also instances in which gifts made under certain circumstances would not use an individual's annual exclusion. An example would be a check made payable directly to an educational institution for tuition. Another example would be a check made payable directly to a provider for medical care. Therefore, an individual could pay $60,000 in tuition for the benefit of the donee and still gift the $15,000 annual exclusion to the same donee in the same year.

The use of annual exclusion gifts is a simple way to reduce the size of an estate over time and avoid using part of an individual's federal gift and estate tax exemption.

Please note that there are circumstances in which a gift tax return may need to be filed even with annual exclusion gifts, although generally, no gift tax may be due.

Charitable Gifts

Another way that gifting can be used to reduce or eliminate estate tax is through charitable gifts. The use of charitable gifts is not only an effective way to minimize estate tax, but gifting to a charity may have income tax benefits as well.

Gifts to charities are generally deductible from the donor's income, and the assets gifted will not be included in the donor's taxable estate. When a donor makes an outright gift of his or her entire interest in the property, the full value of the transferred property may be offset by the gift tax charitable deduction.

For individuals who have reached the age of 70 and a half and have begun receiving their Required Minimum Distributions ("RMD") from a retirement plan, gifting the RMD to a charity may be a way to transfer income that could potentially accumulate in their estate. For eligible tax years, individuals age 70 and a half or older can exclude up to $100,000 from gross income for donations they pay directly from the IRA to a qualified charity. Married individuals filing a joint return may exclude up to $100,000 donated from each spouse's own IRA ($200,000 total). Gifting RMDs directly to charity is an effective strategy for individuals or married couples who may not be able to take advantage of the itemized deduction on their personal income tax return and do not need the RMDs to cover expenses; otherwise, those accumulating RMDs could increase their taxable estate and result in a potential estate tax issue.

Regardless of age, an individual can create a donor-advised fund (DAF) through a financial institution or a local community foundation and gift the desired charitable contributions over several years. The contribution is deductible at the fair market value up to the donor's applicable percentage limitation.

Another option is for the donor to combine two or three years' worth of contributions into a single year. This scenario would make the standard deduction an appealing option in the years in which no actual charitable gift is made. The term for this strategy is known as "bunching." Individuals who would otherwise use the standard deduction can, to a limited degree, bunch certain deductions (e.g.: charitable deductions) into one year and give up the standard deduction for that year. The standard deduction for married couples has been increased to $24,000 and to $12,000 for individuals.

When making a charitable gift, it is also important to consider what asset or assets will be used to satisfy the gift. Appreciated assets are traditionally the preferred choice for charitable gifting for two reasons. The first reason is that the donor can deduct the full value of the gift without being taxed on the gain, and the second reason is because charities are not generally taxed on recognized gains when the contributed asset is later sold. Therefore, it may be a more tax effective strategy for the donor to gift the actual asset to the charity rather than selling the asset and gifting the proceeds.

Charitable gifting is not a strategy for everyone. However, for those who are charitably inclined, there are many ways to achieve your estate planning goals and also reduce your potential estate tax liability through charitable gifting.

Although gifting can be an effective means to transfer property during life, it is imperative to review the estate plan holistically to determine if gifting is an appropriate strategy, as there may be instances in which retaining the property until death may be more tax efficient. One consideration in retaining property is the carryover basis rule. The general rule is that the donee takes the gifted property at the same income tax basis as the property had in the hands of the donor. If the donee were to then sell the gifted asset, the donee would pay capital gains on any appreciation. The carryover basis rule is an important planning consideration because if the donor, instead of gifting the property, retains the property until his or her death, the asset would then get a step up in cost basis to the fair market value of the asset on the date of death. Common examples include low basis stock or farmland.

Conclusion

Gifting can be an effective strategy for estate tax planning. However, certain techniques and strategies may work for some individuals or couples, but not others. Careful consideration should be made as to whether gifting is the right strategy given the current conditions. Everyone has different life, retirement and legacy goals, and gifting as an estate tax planning strategy should be analyzed separately for each individual or couple based upon their unique set of circumstances. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
 
In association with
Practice Guides
by Mondaq Advice Centers
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions