‘Tis the season of giving, and while it is often difficult to find that perfect present for a friend or loved one, gifting as part of your estate plan can be an effective way to pass assets to the next generation. You may have heard that you can make gifts to individuals up to a certain amount each year, but what does that actually mean and how does it apply to you? Depending on your particular situation, the “limits” may be of little consequence to you, and you may be able to give as much as you want to others without any significant implications or out of pocket tax costs.
In 2019, for federal purposes, each U.S. citizen or resident has a combined lifetime estate and gift tax exemption of $11.4 million. Put simply, this means that each person can either die with or give away a total of $11.4 million without paying any federal estate or gift taxes. Also, in 2019, the annual gift tax exclusion is $15,000, meaning that you can give up to $15,000 each year to as many different individuals as you wish without reducing the amount of your lifetime exemption. You can also make direct payments for the medical and educational costs of others without any annual limitation or reduction of the lifetime exemption. (Note in 2020, the lifetime estate and gift tax exemption increases to $11.58 million, while the annual gift tax exclusion remains at $15,000.
If you make a gift to someone over $15,000, the excess simply reduces your lifetime exemption, with no taxes actually due from either the donor or the recipient. Let’s say you have assets of $2,000,000 and you decide at the end of this year to give your child a gift of $115,000. The excess gift above the annual exclusion is $100,000, and your lifetime exemption is reduced from $11.4 million to $11.3 million. Your remaining lifetime exemption is still more than your remaining assets of $1,885,000 ($2,000,000 minus the $115,000 gifted). So, from a federal perspective you would have plenty of opportunity to make gifts over $15,000 without paying any taxes on the gift. And your child does not have to pay any taxes on the receipt of the $115,000 gift.
There is no gift tax in Massachusetts, so there will be no taxes due in this state at the time you make the gift. Further, a gift will reduce the size of your estate thereby potentially reducing the overall Massachusetts estate tax due at the time of your passing, even if the filing of a Massachusetts estate tax return is still required.
In addition, before making a gift of property other than cash, it is important to evaluate the potential income tax consequences. When a gift is made, the income tax basis of the asset is carried over to the recipient. For example, if you own a share of stock that you bought for $10 and gift it to your child, the child’s basis in the stock would also be $10. If you hold onto the stock until you die, the income tax basis would be “stepped up” (or down) to the fair market value of the stock on the date of your death. Thus, in some cases, it might be more advantageous to hold onto highly appreciated assets to minimize income taxes for your descendants.
Finally, you should also consider your cash flow needs and potential long-term care costs before making a gift, so be sure to discuss your plans with your financial and legal advisors.
Giving during the holidays can make you feel good, but so too can gifting as part of your estate plan. You can see your children, grandchildren, or other beneficiaries use and enjoy the property, and there might not be any significant tax or other implications to you. So, the next time you hear that you can only give a certain amount during the year, just remember that might not be the whole story.
Have a great holiday season and best wishes for the new year!
If you have questions about estate planning, probate, trusts, and tax matters, please contact one of Conn Kavanaugh’s experienced estate planning lawyers.