Gifting: Wise Strategies for Wealth Transfer

As we turn the page on another year, it is a good time to review your estate plan and consider making financial gifts to your children and grandchildren.

Making annual gifts has always been an effective way to reduce or avoid estate taxes when you pass away. Even if estate taxes are not an issue for you, making gifts to loved ones can have a huge impact on the lives of your descendants who are attending college or graduate school, trying to save for a down payment on a house, starting a business, or building their own retirement savings plans. Intergenerational gifts are a great way to establish a legacy of generosity that passes from each generation to the next.

If you have been holding off on making such a gift because you believe you are limited in how much you can give or are concerned about potential gift taxes, you may want to reconsider your gifting strategy.

Reducing Your Estate with Annual Gifts

In 2017, the IRS will allow you to make annual gifts of up to $14,000 per person without reporting the gift or paying any gift tax. This amount is tied to inflation and periodically rises in $1000 increments. If you are married, you and your spouse can give $28,000 combined, and if your child is married you can double that amount again without the need to report the gift or pay gift taxes.

For example, assume a married couple has three children, all of whom are married. Husband could give $14,000 to each child and an additional $14,000 to the spouse of each child, which totals $84,000. Wife can make the same gifts, so together Husband and Wife can give $168,000 annually to their children and children’s spouses. Over five years, this couple would reduce their estate by $840,000, plus any appreciation on this wealth. If grandchildren were included, the wealth transfer could be substantially more.

Giving More Than $14,000 in One Year

If you are single and have fewer children and grand-children you might want to consider making gifts that exceed the $14,000 annual exclusion.

For any gift above $14,000, you must file an IRS Form 709 Gift Tax Return on April 15th of the year after the gift is made. Most CPAs can assist with filing this return. For most people, no gift tax will be paid. That is because in 2017 the IRS will allow every taxpayer to transfer wealth of up to $5.49 million either during the taxpayer’s lifetime (gifts) or after they pass away (testamentary transfer) without paying any gift or estate tax. This exemption is called the “applicable exclusion amount” or “unified credit.” We some-times refer to this exemption as the “coupon” amount. A couple has two “coupons” and can apply a total exemption of $10.98 million in 2017 to their wealth transfers.

For example, if you are single and give a child $100,000 in 2017, a gift tax return will be due on April 15, 2018. The return will show that $14,000 of the gift was covered by the annual exclusion and the additional $86,000 will be covered by your “coupon.” No tax is due. The only consequence is that your coupon is reduced by $86,000 and your remaining coupon is worth $5.404 million for future lifetime gifts or the transfer of your wealth at the time of your death.

Most taxpayers do not have estates that approach or are likely to ever approach $5.49 million. That means most of us can make gifts to loved ones that exceed $14,000 in one year and not have to worry about ever paying gift or estate taxes.

If you want to start making annual gifts to descendants, pass valuable real estate to your children, or make larger cash gifts to loved ones, give us a call and we will be happy to discuss this with you.