Gifting as an Estate Planning Tool

A change in the makeup of Congress is a good time to review your estate planning strategy. One consideration is whether gifting, sometimes referred to as “lifetime gifting,” would be an appropriate addition to that strategy.

All United States citizens are permitted to make a gift of up to $15,000 in value per person, per year, without incurring any tax liability or being required to disclose the gift to the IRS. For example, you could give your child a gift of $15,000. That child would not have to file anything with the IRS, and neither would you. If you also gave $15,000 each to your other children in that same year, you would still not be taxed or required to disclose those gifts to the IRS because you would not have exceeded the $15,000 per person, per year limit. But what would happen if you exceeded the $15,000 limit because you gave a child $115,000? Two things.

First, you would have to file an IRS Form 709 Gift Tax Return. We highly recommend enlisting your accountant to prepare this return. This return would disclose the amount of your gift as well as any previous gifts that exceeded the $15,000 threshold.

Second, the amount over the annual gifting limitation would be deducted from your overall estate and gift tax exemption amount, commonly referred to as the estate tax “coupon,” which is currently $11.7 million per person. This coupon is the total amount that any one United States citizen can give to non-spouse individuals before the estate property is subject to taxation. It can be used up partially or entirely during a person’s life or after death, depending on the estate planning strategies employed. For the purposes of your gift to your child, this means that you would be required to file a Form 709 Gift Tax Return, reporting to the IRS that you exceeded the annual gifting amount by $100,000, and that your total remaining coupon was now reduced to $11.6 million.

Married couples who are both U.S. citizens also have the option to “split” gifts. Spouses can give their respective gifts to the same person, thereby leveraging the amount that can be given away hassle-free. For example, you could give your child $15,000, and your spouse could also give that same child $15,000 in the same year. Your child has now received $30,000 tax free, and neither you nor your spouse has used any of your estate tax coupon amount, or is required to file any special tax return.

So why does this matter?

Without any further action from Congress, the laws that originally increased the coupon from $5 million to $10 million will expire in 2026. The coupon amount will then drop back down to $5 million, indexed to inflation. Clients whose net worth exceeds $5 million could take advantage of the current coupon amount by using the entire Gifting amount now and give away up to $11.7 million without incurring any estate or gift tax. And of course, there is the possibility that Congress will elect to further reduce the estate tax coupon making it even more beneficial to gift significant amounts while it can be done in a favorable estate and gift tax environment. Individuals who gift the full amount now will not be penalized after the coupon amount reverts to a lower amount in 2026.

For clients with Spousal Lifetime Access Trusts or Self-Settled Trusts, the window of opportunity for leveraging the elevated estate tax coupon of $11.7 million, before it reverts to $5 million in 2026, is closing. The next four years present a unique planning opportunity. Furthermore, for individuals who have a net worth of less than $11.7 million, the primary downside to gifting significant amounts of money during life (other than no longer being able to spend it yourself) is the Form 709 filing requirement. So, if you were delaying a gift because you were concerned about incurring a gift tax, perhaps your decision is worth reevaluating.