There’s a time limit on the current opportunity for tax-free giving. It expires after tax year 2025 (unless Congress alters the expiration date). The sooner you exploit this, the more you can give—plus, the more you give away, the smaller your estate gets. It means there is less chance that your estate will have to write a check to the IRS.
The Street’s recent article, “This Is the Golden Age of Tax-Free Gift Giving,” says the federal government has taxed estates since 1924, and as recently as 2001, the threshold when taxes kicked in was $675,000. This exemption level from taxation has been increased ever since. However, a big increase came from the Tax Cuts and Jobs Act, which took effect in 2018. The Act doubled the exemption level and indexed it to inflation. Anything above the new limits is taxed at 40%. It’s $11.4 million for singles and $22.8 million for married couples in 2019.
Although the exemption for estates is sky-high for now, it never hurts to reduce your estate with gifts to your loved ones. While this is nice for them, it’s also good “just-in-case” planning. If you were to die in 2026 and the exemption was reduced, and you hadn’t gifted assets away, heirs of larger estates may have to pay hefty estate taxes that could have otherwise been avoided.
My favorite no-brainer gifting strategy is the “annual exclusion,” the tax-free gift you can give one person in any given year, which amounts to $15,000 currently. And although you can’t carry over an unused portion to the next year, there is a multiplier effect for couples with several beneficiaries. For example, both spouses could each give the maximum to a child, or $30,000 total. In addition, they could then do the same thing for the child’s own spouse, for another $30,000.
A smart gifting strategy is to place the gift in a trust, so the funds are protected from the beneficiary’s creditors (even a former spouse). The givers can also maintain some control over the uses of the money.
For the very generous, the donor could put the proceeds into a “donor” trust (also commonly known as a “grantor” trust), where he or she is responsible for any taxes on income that the gift generates. That essentially amount to an additional tax free gift, by assuming the tax liability. You can turn off that feature in the future if desired (if the trust is drafted properly to allow for that).
However you look at it, right now really is the golden age of estate planning and gift giving. Talk with your estate planning attorney to learn how you can be proactive and make the most of it for your family.
Reference: The Street (February 7, 2019) “This Is the Golden Age of Tax-Free Gift Giving”