As we approach year-end, the holidays are a fine time to share the wealth
By Lou Stemmler, MBA
One of the many benefits of amassing wealth is the opportunity to share it with the special people in your life. One of the burdens is the avoidance of sharing too much of that wealth with the government, both at tax time and when you shuffle off this mortal coil. The effective use of tax-free gifting can help to direct more of your wealth where you want it to end up.
There are three basic elements of gift tax allowances in the United States tax code. (Please note that we are simplifying here, and there is never anything simple about the tax code.)
- The easy one, and the focus of this article, is the annual gift exclusion. Affecting gifts valued up to $14,000 for 2017, this annual exclusion can benefit any American taxpayer.
- You can make payments directly to educational institutions and healthcare providers on behalf of loved ones for qualified tuition or medical expenses without tax consequences.
- The big one, the lifetime gift exemption, which is $5.49 million for 2017, only pertains to those with estates worth at least, well, $5.49 million at the time of their death. There are, of course, complicating factors to this; if your estate is that size or larger, congratulations, but we strongly suggest that you get professional advice about how to best utilize and track your lifetime exemption. Furthermore, as we write this in late 2017, it looks like Washington will be changing this one, so keep an eye on the headlines (or keep in touch with your accountant).
Before moving on, let’s note that your author is NOT an attorney and this article should not be considered legal advice. It is our experience that attorneys lose the ability to speak plain English sometime during law school. In our attempt to simplify these complex topics, I’m confident that we’ve already set trust and estate attorneys’ heads spinning with our casual use of some of their lingo (and we haven’t even used any Latin terms yet). Nonetheless, we intend to offer useful information that, at a minimum, should strengthen your knowledge and better prepare you for any pertinent dealings with your attorney.
Families and individuals can make effective use of the annual gift tax exclusion. For 2017, that means that you can make gifts to as many individuals as you wish of up to $14,000 in value each. The gifts can be cash, stock, gold coins, a car (presumably used), or Aunt Bessie’s Hummel figurines, as long as the fair market value of each gift does not exceed $14,000. Married couples can combine their gifts to double the exclusion to $28,000 for each recipient. (For those planning ahead, the I.R.S. has announced that the inflation adjusted annual exclusion goes up to $15,000 for 2018.)
Benefits and some considerations:
- This is a simple way for parents and grandparents to provide support to their children and grandchildren.
- If you DO possess sufficient assets to be subject to estate taxes when the time comes, annual gifting is a useful tool for moving assets out of your estate without tax consequences.
- Annual gifts made under this exclusion do not count against your lifetime gift exemption.
- The cost basis of stocks and other gifts usually travels with those gifted assets, meaning that the recipients may have to pay capital gains taxes if and when they sell the asset.
- Parents and guardians of minor children should research the benefits of applying their children’s gifts to a trust benefitting those children, rather than a Uniform Gifts/Transfers to Minors Account (UGMA or UTMA), which usually turns over all the assets to the child at age eighteen. This could also lessen the child’s eligibility for student loans and scholarships.
In our family, year-end has always been the time for dealing with annual gifts, donations, and other matters of financial maintenance; perhaps that can work for your family, too!
For more information on gifting, here is the link to the I.R.S. FAQ page.