The bad news is that there is a Federal tax on assets that you give away during life, at death, and to individuals two or more generations below you. The good news is that this tax will only apply to the wealthiest Americans and, even so, there are strategies you can use to minimize or avoid its application. The Federal estate, gift and GST tax only kicks in above a certain dollar threshold. Furthermore, there are additional wealth transfer strategies that do not trigger any tax at all if structured properly.

Taxable Gifts

There is a Federal estate and gift tax that kicks in only when you make taxable gifts above a certain amount.  In 2020, each person can give away $11.58 million during life or at death before incurring a Federal gift or estate tax ($23.16 million if you “split” the gift with your spouse). This is your Federal “exemption” from estate and gift tax, and it increases every year with inflation.  Taxable gifts made above this amount generally incur a 40% tax. In addition, gifts to grandchildren can be subject to a separate “generation-skipping transfer” (or “GST”) tax if they exceed the GST tax exemption amount, which in 2020 is also $11.58 million per person.  The federal estate and gift taxes are unified, which means that gifts utilizing exemption during life will deplete the amount of exemption available at death. See this Cheat Sheet for a quick breakdown of the Federal Estate, Gift and GST taxes.

ExampleMary gives $1M to each of her three grandchildren during life. As a result of these lifetime gifts, Mary uses $3M of her federal gift and estate tax exemption, as well as $3M of her GST exemption (because the recipients are grandchildren).  Mary has $8.58M left that she can give away free from federal estate or gift tax. If Mary dies, and her remaining estate is over $8.58M, the amount above $8.58M would generally be subject to federal estate tax and possibly GST tax (i.e. if it passes to grandchildren or more remote descendants).

In addition, Mary may live in a state that imposes its own state estate or gift tax. New York and Connecticut, for example, currently impose their own separate state estate tax with lower threshold exemption amounts as compared to the federal tax. For a snapshot of the estate taxes applicable to residents of certain states, see this Cheat Sheet.

Tax-Free Gifts

In addition to these lifetime exemptions, there are some “freebie” gifts that you can make that will not count against your lifetime exemption and will also not incur estate, gift or GST tax:

  1. “Med/Ed” Gifts. Gifts for medical or educational purposes are unlimited in amount but limited in purpose. Payment must be made directly to the medical or educational provider in order to qualify, but there is no maximum on how much you can give.
  2. Annual Exclusion Gifts. Gifts that qualify for the annual exclusion from gift tax are limited in amount, but unlimited in purpose. You can give $15,000 each year to any person for any reason ($30,000 if you “split” the gift with your spouse). These gifts can be made outright, to a qualifying trust, or even to a 529 College Savings Plan.

Example – Mary contributes $15,000 to each of her grandchildren’s 529 plans, or hands each of them a check for $15,000 every year. Mary also pays their college tuition directly to each of their colleges. Besides being a generous grandmother, Mary is also being smart in how she makes gifts to her grandchildren. Each of these gifts is not only tax-free, but none of the gifts count against her lifetime exemptions from Federal estate, gift or GST tax.

 

Updated January 2020

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.

Richard Yam, J.D.

Rich is vice president of trusts & estates, and is based in our New York office.