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The Season of Giving: Annual Giving is Still a Helpful Estate Planning Tool

Despite the increased Estate Tax Exemption to almost $11.2 Million per person, the practice of annual gifting is still a valuable estate planning strategy. Many of you are familiar with this strategy, and use the holiday season to share your annual gifts with friends and family. And, income tax savings takes center stage in some planning ideas related to your choice of gift.

In 2018, the annual exclusion is $15,000, and you can gift this amount to as many individuals as you desire. You and your spouse can gift $30,000, if you wish, through a technique known as gift splitting.

Although “cash is king”, I’d like to share several strategies that might help you and your family save income tax while also accomplishing your annual gift plan.

Appreciated Assets: At the top of my list is gifting appreciated securities or other assets with low cost basis to family and friends in lower tax brackets. This can provide significant tax savings. Many individuals are reaching into the 20% capital gains tax bracket and are also subject to the Net Investment Income Tax of an additional 3.8%. Gifting of these securities to those in lower tax brackets could save anywhere between 8.8% and the full 23.8% tax, if the donee qualifies for the zero percent rate!

Caution: Be mindful of the Kiddie Tax rules, whereby donees may be subject to higher tax rates on unearned income.

Gifts of partial interest in real estate or a partnership interest: This type of gift provides expanded benefits, but may be more costly to you and requires a longer lead-time. Oftentimes, partial interests in real estate or a partnership interest qualifies for discounting. For example, a gift of a 10% undivided interest in real estate valued at $150,000 may qualify for a 15% discount. Therefore, your $15,000 gift could equate to only a $12,750 gift for gift tax purposes.

There are some key factors which impact the discount rate, and we recommend having a qualified appraisal to accompany the gift, but this strategy can help pass on assets and use less of your exemption or annual exclusion. Plus, it may still have the added income tax benefits for those donees in lower tax brackets.

Caution: You must provide adequate disclosure of the gift and its value on an annual gift tax return, and there are additional requirements and costs for the appraisal and legal fees with this type of gift. Be sure to consult your advisor before including this as part of your annual gift or estate tax plan.

Gifting to 529 Education Plans: Setting up a 529 plan for future education costs can be a valuable income tax saving and estate planning tool. As you may know, these plans provide tax-free earnings, and potentially, tax free distributions when used to pay for higher education costs. Talk about exponential income tax savings! And now, an added bonus, the new TCJA has expanded this benefit to be used on private tuition for K-12 up to $10,000 per year.

Although this is a gift of a future interest, which normally does not qualify for the annual exclusion, a special provision allows these gifts to count! And, through a special election, you can prefund the account with $75,000 (or $150,000 with gift splitting) and elect to spread the gift over a five year period. There are some caveats, so please call us if you are interested in this special provision.

The following are not subject to the annual exclusion limit, but can still be valuable estate and income tax planning tools:

  • Direct payment of tuition or medical expenses: no limit as long as paid directly to the educational institution or the medical provider. This gift completely bypasses the above rules.
  • Gifts to spouse: Unlimited!
  • Charitable Giving: More to come in our next article!

In 2019, consider making your annual gifts at the beginning of the year. We just never know what might happen between January 1 and December 31, and the $15,000 annual exclusion starts over on 1/1/19. Don’t forget…. ALL gifts count, even the small ones.  So if you like to make smaller gifts at birthdays or holidays, you may want to leave room for those when making your larger gifts. For instance, gift $14,500 so you still have $500 for the smaller gifts throughout the year.

These are just a few ideas to consider.   Please contact us to discuss other planning ideas! We would love to help!

Happy Holidays & Happy Gifting!


About the Author

As the leader of our Family Wealth Services Team, Elaine Cain has been with Yount, Hyde Barbour since beginning her accounting career in 1994. Elaine provides comprehensive tax, estate, trust, and gift planning and advisory services to wealthy families and individuals. Elaine also has extensive experience in conducting audits and providing tax compliance and consulting services to nonprofits and governmental entities.