With all of the political uncertainty and recent changes in the tax law, our clients are wondering what to do about gifting. Below are answers to three commonly asked questions that we are getting this time of year. Note that this blog covers non-charitable gifts.*

1. Do I need to make gifts before the end of the year?

Only if you are making annual exclusion gifts. You may give away $15,000 per person ($30,000 if gift-splitting with a spouse) each year tax-free. If you want to use your annual exclusion for 2019, the gift needs to be completed before the end of the year. Remember that gifts to insurance trusts to cover life insurance premiums may eat into your available annual exclusion amounts.

If you plan to make gifts above the annual exclusion amount and therefore use some of your lifetime exemption (e.g., a larger gift to a SLAT or Dynasty Trust), there’s no rush to make the gift before the end of the year.

But the sooner you can make that gift, the better. For starters, remember that the appreciation on that gift will also escape estate tax; but this is always the case. For larger estates, the more pressing concern is the election. We know that under current law, the increased exemption amounts don’t expire until 2026, at which point they revert to pre-2018 numbers. Current law, however, can be changed. In other words, we could have a shorter window of opportunity to make large gifts than we originally thought.

2. How much should I give away?

It depends on taxes, your financial needs, and your comfort level. We know that you can give away $11.4M in 2019 without incurring federal gift or estate tax, but that doesn’t mean that you can or should. Tax consequences are usually the starting point, but that’s not where it ends. Your answer here will depend on your specific situation.

Here’s a simple framework for spouses to consider:

  • If your estate is over $20M: Aim to make gifts now or early next year in order to take advantage of the increased exemption. The amount will depend on the size of your estate. If your estate is significantly larger than $20M and you have plenty of other assets to meet your financial goals, it may be a no-brainer to use as much exemption as possible. You may also wish to leverage your exemption by using strategies that involve discounting. If, on the other hand, you are concerned about giving away funds that you may need someday, each spouse might consider creating a SLAT for the other spouse. “SLAT” stands for spousal lifetime access trust, which is simply an irrevocable trust where the grantor’s spouse is a permissible beneficiary (typically along with children and grandchildren). By including your spouse as a beneficiary, you retain indirect access to the trust assets. If spouses create SLATs for each other, however, it’s important that the terms of the trusts are not identical.
  • If your estate is between $10M and $20M: This is the gray area where you’ll need to examine your individual circumstances and crunch the numbers. Will making large gifts be a lifestyle sacrifice for you? Or are your financial needs fully covered with a lot of room to spare? How much you can or should give away will depend on the answers to questions like these.
  • If your estate is under $10M: Gifting in order to avoid federal estate tax probably isn’t a concern for you since you’ll likely have enough exemption to shield your estate – even when the exemption goes down. Depending on which state you live in, though, it may be wise to ensure that your estate planning documents incorporate state estate tax savings techniques (such as credit shelter trusts).

3. If I make a gift now, can the IRS invalidate it once the estate tax exemption goes back down in 2026?

No. The IRS recently passed final regulations ensuring that gifts can’t be “clawed” back into your estate once the exemption decreases.

 

[1] Remember that state taxes may need to be considered as well.
*For more on charitable giving, check out these blog posts about Qualified Charitable Distributions and Donor Advised Funds.
Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2019 Wealthspire Advisors

Nicole Hart, J.D.

Nicole Hart is head of our trusts & estates department and works in our New York office.