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Estate planning and gift-giving taxes and strategies

June 15, 2022
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An estate plan is an integral part of the financial planning process. It is conceived to carry out your wishes upon death.

Some folks choose DIY, do-it-yourself wills, or trusts. Ultimately, it is your choice, but given the complexity of estate planning, we strongly recommend that you seek guidance from an attorney. An attorney that specializes in estate planning can lead you through the process and draw up plans that will establish the appropriate strategy for you.

Many clients have questions about gift taxes and gift-giving. Estate planning and gift tax rules are complicated, so this will be a high-level overview. Please consider consulting your attorney or tax advisor for any questions.

Under the current law, the lifetime exemption for gift and estate taxes last year was $11.7 million for individuals and $23.4 million per married couple. For 2022, the thresholds rise to $12.06 million per person and $24.12 million per couple.

The annual gift-tax exemption in 2022 is $16,000 per donor, per recipient, up from $15,000 last year. Therefore, a giver can give someone a gift that is valued up to $16,000 in a calendar year, and the giver will pay no federal gift taxes. If the gift comes from a couple, the limit doubles to $32,000. Even then, if you exceed the thresholds, it’s unlikely you will owe federal taxes on your gift, as we’ll explain in a moment.

Please note that in 2019, the IRS clarified that individuals taking advantage of the increased gift tax exclusion in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

Because it is a gift, the recipient owes no federal income taxes, nor is it deductible for the giver. Gifts to a qualified charity may be tax-deductible and are not subject to gift tax limits.

What if your gift exceeds the prescribed limit? Do you, the giver, owe a gift tax? The short answer is probably not. You see, the annual limit is also applied to the lifetime exemption of $12.06 million per person and $24.12 million for a couple (for 2022).

For example, if Mom gives a $20,000 gift in 2022 to her daughter, Mom exceeds the $16,000 annual limit by $4,000. Taxes can still be avoided as long as Mom files the U.S. Gift Tax (and Generation-Skipping Transfer) Form 709 with the IRS.

What gifts are excluded?

  • Gifts that are not more than the annual exclusion for the calendar year.
  • Tuition or medical expenses you pay for someone.
  • Gifts to your spouse.
  • Gifts to a political organization for its use.
  • Gifts to qualifying charities.

6 strategies you may utilize

  1. Give extra. If you are wealthy and won’t need the assets, consider giving above the annual exclusion. While you will file a gift tax form with the IRS, you may rely on your large lifetime exemption. 
  1. Give assets that are appreciating, as these assets remove any future appreciation to the estate. But beware of taxes. When received as a gift, the recipient will usually receive the cost basis of the donor. If the recipient sells, the assets will be taxed on the appreciation as a capital gain. If the gift is inherited, the tax basis will increase to the current value, potentially reducing taxes if the asset is sold. 
  1. Gift assets from joint owners. This doubles the amount of the gift without running up against annual exclusion. 
  1. Spread out the gifts over several years. Recipients get all that you want to give them, just over a longer period of time. 
  1. Paying for tuition or medical expenses avoids the annual limit. But they must be paid directly to the institution, not the recipient. 
  1. Be careful. Speak with your attorney or tax advisor if your assets include real estate or business holdings that could generate unwanted tax liabilities without proper planning.

We trust you’ve found this review to be educational and insightful. If you have any questions or would like to discuss any matter, please feel free to give our office a call.

As always, thank you for the trust, confidence, and the opportunity to serve you.


Sources

IRS: Frequently Asked Questions on Gift Taxes

IRS: Estate Tax and Gift Tax FAQs

SmartAsset: Gift Tax, Explained: 2022 and 2021 Exemption and Rates

Retirement Watch: Wise Estate Planning Strategies to Plan Gifts

WSJ: Estate and Gift Taxes 2021-2022: What’s New This Year and What You Need to Know

Estate Planning: A 7-Step Checklist of the Basics

2020-2021 Gift Tax Rate: What it is, How it Works, and Who Has to Pay it

2021-2022 Gift Tax Rates: I’m Generous, but Do I Have to Pay This?

Intuit: The Gift Tax Made Simple