Consider Family Gifting Before Year-End

By Matthew R. Adams on October 14, 2020

If you have contemplated giving a generous financial gift to a loved one, you should know what the gifting rules are.

Each tax year, you can gift up to $15,000 to anyone without worrying about the lifetime estate and gift tax exemption ceiling. If married, your spouse could also gift up to $15,000 to the same individual, or $30,000 per year per recipient.

If you happen to be generous with your considerable wealth, you can give away up to $15,000 to an unlimited number of people each year without potentially triggering future estate tax liability.

Currently, the lifetime estate and gift tax exemption amount is $11.6 million per individual. Obviously, the vast majority of Americans won’t have an estate anywhere approaching that figure. However, for those that do, or could decades from now, should consider annual gifting to chip away at their growing future estate.

Here is a powerful example:

A married couple in their late 60s who gifts $15,000 per year to their two children and three grandchildren begin lowering the value of their estate by $150,000 per year. Over twenty years, that is $3 million in total wealth removed from their estate. At an 8% compounding growth rate, that is close to $6.9 million in a tax-free wealth shift from one generation to the next!

Here is something else to consider for those who will die as millionaires but not with an eight-figure net worth. If the 2017 Tax Cuts and Jobs Act estate tax provision “sunsets” in 2025, the lifetime exemption amount will revert down to an inflation adjusted $6 million per person (approximately). Estates valued above this amount would then be taxed at the 40% federal estate tax level. Certain states have also adopted or proposed state estate taxation, so the risk of future estate taxes is one to certainly consider.

Giving cash isn’t the only way to provide a gift to a loved one.

If you have appreciated stock, there is a strategic reason to gift that to a loved one. By gifting appreciated stock, you can personally avoid the capital gains tax on your profit.

If you’re a grandparent or anyone else outside the immediate family, it’s also possible to front load your gifting to a child’s 529 college savings plans. A grandparent, for instance, could contribute up to $75,000 to a grandchild’s 529 plan and spread the gift tax exclusion over five years. A married couple can contribute up to $150,000 over five years.

In summary, a shift in focus to lifetime gifting can be powerful. Annual gifting to your heirs, if done consistently, can transfer substantial wealth to the next generation free of estate tax.



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