A gift is a transfer of property to another person while receiving nothing, or less than full value, in return. Gifting property to your beneficiaries during your lifetime can be a useful tool in estate planning by:
- reducing the value of your estate that would be subject to estate tax; and
- transferring the built-in appreciation in value of gifted assets to the donee (recipient of the gift); and
- making gifts to minor beneficiaries, with potential exclusions from tax liability (e.g., a gift of $75,000 (in 2020) to a Section 529 plan in the first year is tax-free, as long as the contribution is treated as a series of five (5) equal annual gift tax exclusion gifts); and
- otherwise transferring assets to your beneficiaries, as a part of business succession planning.
In Florida, there is no Florida estate tax to be paid on the estate of the person who died; but the estate of a Florida decedent may be subject to a federal estate tax.
However, the passage of the Tax Cuts and Jobs Act of 2017 (“TCJA”) makes lifetime gifting for the purposes of reducing the value of an estate subject to estate tax, far less relevant for most taxpayers. Pursuant to the TCJA, the lifetime federal estate, gift and generation-skipping transfer tax exemption amount (that is, the total amount an individual can leave to heirs during their lifetime and at death, and pay no federal estate or gift tax) has increased substantially, to approximately $11.58 million per person (or approximately $23.16 million for married couples) in 2020. However, the current estate tax exemptions under the TCJA lapse in 2025, at which time it is unknown if they will revert to the 2017 estate tax exemption level ($5.49 million), or to some other amount.
Nevertheless, lifetime gifting can be incredibly useful, particularly when the donor is transferring built-in and unrecognized appreciation in value of the gifted assets to the donee. It may also be beneficial to gift to family members if the taxable income related to the gifted asset can be shifted to family members with lower marginal tax rates than the donor.
If the gift qualifies for the annual gift tax exclusion, then the gifted asset can be transferred to the beneficiary free of any transfer taxes (that is, free of any gift tax), without having to file a gift tax return and using part of your lifetime exemption, assuming the donor has not fully used his or her lifetime gift tax exemption amount ($11.58 million per person in 2020). The annual gift tax exclusion only applies to a “present interest” gift – where the done must have an unrestricted right to the immediate use and enjoyment of the gift. (A gift of a future interest is generally taxable, regardless of the amount of the future interest gift.)
In 2020, the annual gift tax exclusion amount is $15,000 per person. That means, in 2020, you can give up to $15,000 each to multiple individuals without having to file a gift tax return. If you are a married, then in 2020, you and your spouse can give up to a combined $30,000 to multiple individuals without having to file a gift tax return. If you give a gift greater than the annual gift tax exclusion amount, then you (as the donor) must file a gift tax return. However, you may not owe any gift tax.
For each year, the amount that you give as a gift to another person that is greater than the annual gift tax exclusion amount ($15,000 per person, per donor, in 2020), is accumulated and counts against both your lifetime gift tax exemption and your federal estate tax exemption, until it reaches the lifetime estate and gift tax exemption amount ($11.58 million per person in 2020). You do not pay gift tax until you have gifted away an amount that is more than your (or if married, your and your spouse’s joint) lifetime estate and gift tax exemption. When you die, if you have given away more than your lifetime estate and gift tax exemption amount, then you will be subject to estate tax for the value of the gifts that are greater than the lifetime exemption.
The Internal Revenue Code also allows for the direct payment of tuition or medical expenses of another person (i.e., directly to the educational institution or the medical provider) to not be classified as a taxable gift, regardless of the amount.
Special considerations should be made if you would like to make a lifetime gift to minor children. For example, one of the following options may be appropriate:
- Unified Gifts to Minors Act (UGMA) / Uniform Transfers to Minors Act (UTMA) accounts: This type of account provides for a custodian to hold property, which can be used for a minor child’s health, education, maintenance and support until such child reaches the age of majority in the state where the child resides. A transfer to an UGMA or UTMA account is considered a present interest gift and eligible for the annual gift tax exclusion. Upon reaching the age of majority, the child is entitled to receive all the account assets outright.
- Section 529 college savings plans (Qualified State Tuition Programs): Section 529 plans (which differ from state-to-state) are state-sponsored investment programs designed to help save for a child’s higher education. Section 529 plans allow you to gift up to $75,000 (in 2020) in the first year, tax-free, as long as the contribution is treated as a series of five (5) equal annual gift tax exclusion gifts).
If you need help with evaluating, planning for, and gifting assets to one or more beneficiaries during your lifetime, please contact our office to set up an appointment.