Friday, December 8, 2017

'Tis the Season for Gifting

Since restarting the blog we have focused primarily on basic estate planning concepts, explaining the various documents and how they work together to create a plan to address the uncertain and unexpected changes that come along during life. Over the next few blogs we are going to move into some more complex planning issues and address how they can be part of an estate plan. In the spirit of the season, we will start with the topic of gifting.

Any time of the year, but especially during the holiday season, clients often consider how they can help their loved ones by gifting cash or other property to them. Obviously the inclination to gift is important, but in the context of estate planning, gifting is generally associated with the tax implications of transferring assets, be it money, real estate, business interests, or any other property. The tax implications of gifting are a pressing issue because the Internal Revenue Code (the “Code”) imposes a Gift Tax on any gifts above a certain level.
The Code treats gifts during lifetime and at death in a similar manner considering them both transfers of wealth that may be taxable if the gifts exceed a certain value. The general rule is the Code imposes a tax on the transfer of wealth, but there are a number of exceptions to the general rule. First, gifts to a spouse are not taxed, unless the donee spouse is not a U.S. citizen. Second, gifts to anyone (relatives or otherwise) to pay for education or medical services are also exempt from gift tax as long as those gifts are paid directly to the school or provider. Third, there is an “Annual Exclusion” amount that allows a person to make as many gifts as they want, to as many people as they want, as long as the total gifts to a single person in a year are under a certain amount known as the Annual Exclusion (currently $14,000.00 and rising to $15,000.00 in 2018).
If a gift to any one person exceeds the value of that Annual Exclusion it counts against the giver’s Unified Credit which can be used during lifetime or at death. The Unified Credit translates into an “Exclusion Amount” which is currently $5,450,000.00 and set to rise to $5,600,000.00 in 2018. The Exclusion Amount can be used to protect transfers at death from Estate Tax or gifts during lifetime from Gift Tax. Each dollar of the Exclusion Amount used by a person during their life reduces their Exclusion Amount at death. If a married person does not use their full Exclusion Amount during lifetime or against Estate Tax at death their surviving spouse can add any unused portion of that Exclusion Amount to their own Exclusion Amount. The result of all of these exclusions is that a married couple can give away in excess of $11,000,000.00 in their lifetime without ever paying any tax on those gifts, which currently make the Gift Tax a very low impact tax, except in the case of high net worth individuals. Congress is currently debating changes in estate and gift taxation. If changes become law, we will discuss this then.
Because for the majority of the population has little worry about making taxable gifts, why is gifting a concern in estate planning? In our experience, issues with gifts revolve more around the personal impact of gifts to the donee rather than the legal impact. People commonly express concerns about gifting different amounts to different children, the impact of making gifts to children who may not make good use of the assets, their own financial security if they choose to make gifts, and the impact of gifting on other aspects of planning, including Medicaid. The stress and anxiety of these questions frequently outweighs a person’s concern about writing a check or turning over control of another asset.
When assisting clients navigating these issues we focus first on the client and ensure that the gifting is both the client’s desire and that the gift will not have a negative impact on the client, either currently or long-term. We remind our clients that they worked hard to accumulate the assets they have and that they should not give away anything that would result in a negative impact to their own lifestyle. Once the client is comfortable their own needs are taken care of, we can then discuss with them their particular situation on how to make gifts to assist loved ones, yet attach strings to protect against the known failings of those loved ones.
It is possible to use Trusts to make gifts to children or grandchildren, but place limits on the use of those gifts and also protect those gifts from creditor problems. One can also structure an intra-family loan that uses gifting to return loan payments to children at the end of the year (or simply provide children with the funds to make the loan payments). It is possible to structure the terms of a Living Trust to take into account gifts made to beneficiaries during lifetime and offset distributions from the Living Trust by the value of the lifetime gifts so that children ultimately receive the same distributions whether during their parent’s life or at death.
Gift planning, as with any other type of tax planning, should never let the “tax tail wag the dog”. By this we mean while it is important to consider the tax ramifications of the gift, it is more important to make sure the gift makes sense after a sound analysis, and then consider strategies enabling the avoidance of taxation. As we always stress, working with an attorney experienced in the legal obstacles and solutions is critical to avoiding mistakes and unanticipated consequences.
Matt and Al

1 comment:

  1. Very nice, and understandable, discussion of what is a very complicated bundle of regulations.

    ReplyDelete

We welcome and appreciate your comments but remind you that while not all viewpoints are equally respectable, all people should be treated with respect. The authors do not actively moderate comments but reserve the right to remove comments that are offensive, derogatory, or contain spam.