Gifting Strategies During Life to Help Reduce Estate Taxes

Gifting Strategies During Life to Help Reduce Estate Taxes

November 2, 2021

Amassing wealth comes with many benefits, but having a substantial estate comes with the repercussions of elevated taxes. Gifting portions of your assets to mitigate tax ramifications is possibly a reasonable strategy to help ensure you optimize your estate’s potential. By employing tax and financial planning strategies, you can maximize gifts to your loved ones and beneficiaries, all while reducing tax consequences.

What constitutes a gift?

Gifts that qualify for the gift tax are any contributions (quantified in money or value) made to an individual that is unequal to funds received in return. In other words, you are gifting the amount to a chosen individual without expecting payment back. There are certain gifts excluded from the gift tax. Contributions under the exclusion threshold, educational accounts and payments, medical aid, gifts to your spouse, gifts given to qualifying charities and political donations do not apply.

What are some tax advantageous strategies to consider?

The most straightforward strategy is setting up reoccurring annual gifts to loved ones. For 2021, annual gift tax exclusions are $15,000, regardless of relation to the recipient or quantity of recipients. Annual gifting of $15,000 (in 2021) may not seem like much, but it quickly adds up if done every year. You and your spouse may each contribute that amount to individuals, and many enjoy being able to help the recipients while they are alive, rather than simply after passing.

Educational accounts, namely 529s, have the same contribution limitations as annual gift tax exemptions. A married couple can contribute $30,000 (in 2021) to an individual’s 529 annually, and each state has a set lifetime contribution limit. 529 plans specifically can allow you to give five years’ worth of gifts at once ($150K per couple), frontloading the benefit into a tax-exempt vehicle. One caution must be considered with 529s: the funds return to the estate upon the benefactor’s death if they were gifted within the previous five years.

GRATs (Grantor-Retained Annuity Trusts) are another opportunity to minimize tax burdens on large estates that wish to freeze portions of their estate’s current value and shift the appreciation of those assets to their beneficiaries without generating gift taxes. GRATs are attractive if a few uncontrollable variables work in the grantor’s favor (low interest rates, positive growth rates and lifespan), so a thorough discussion is required to examine if GRATs make sense for you.

Who is responsible for the gift tax, and may I deduct these gifts from my income tax?

Gifts beyond the annual limit of $15,000 will reduce your lifetime annual exemption (currently at $11.7 million). However, it is important to note that gifting to individuals (non-charities) is not tax deductible. Please refer to IRS’ About Publication 559, Survivors, Executors, and Administrators to decipher whether your gifts apply to your lifetime exemption or your annual exemption. This informative article can guide you through the many different aspects of distributing a final estate, including how taxes impact the process, and will help you understand the importance of the gift tax strategies we are discussing.

With the current lifetime exemption of $11.7 million due to expire at the end of 2025, or sooner if Congress makes a change, both the annual exemption and the lifetime exemption will impact a far larger portion of the population. Now is a great time to speak with an estate planning attorney and Wealth Manager to prepare and strategize around these various structures.


Source: Internal Revenue Service

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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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