TRUST & ESTATE PLANNING

Give It Away Now? Tax Reform Raises the Ceiling on Lifetime Gifts

03.22.2018 - Gerard F. Joyce

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While 2017 was a banner year for the markets, it was also a remarkable year for taxpayers. Amid the slew of changes introduced by the Tax Cuts and Jobs Act, one could ultimately have the most significant impact on family wealth: the amount that is exempt from federal estate, gift and generation-skipping transfer tax has doubled. In 2018, individuals can transfer up to $11.18 million and married couples can transfer up to $22.36 million tax free. 

Q. Are the new estate tax laws a game-changer for my estate plan?

Bryan: With the exemptions now doubled, the amount you can transfer tax free to your beneficiaries is dramatically higher. This applies to transfers at death, and also offers an opportunity to make lifetime gifts that previously would have been subject to gift tax at a rate of 40%.

However, these opportunities are limited because a sunset provision in the new tax law means the higher exemptions expire at the end of 2025 and revert back to their previous levels. If the value of your estate falls below the new thresholds, it might seem logical to assume you no longer need to think about estate taxes. But that would be a false assumption, because these new thresholds are not permanent. 

So, this really is a game-changer for many families because it requires that they take a new, close look at their estate plans. 

Q. Is it better to gift assets during my lifetime or as part of my estate?

Gerry: The answer to that question depends on a number of variables and your specific situation. But it really is important to consider the question carefully: Some assets might be better to give during your lifetime and others might be better to leave as part of your estate. The goal is to maximize the after-tax value of the assets you pass along to your beneficiaries.

With respect to gifting, an asset’s growth potential is the first factor we look at. In general, the more an asset is expected to appreciate in the future, the greater its gifting “value” from a tax perspective. For example, gifting an ownership stake in your company while it’s young and in the early development phase will ultimately pass on much greater value to your beneficiaries than gifting ownership in a business that has already matured. Any appreciation after it is gifted will belong to your beneficiaries and not be subject to future gift and estate taxes.

Bryan: The other important factor we look at is income tax cost basis, because assets gifted during your lifetime are taxed at their original cost basis. That means if you give away an asset that has appreciated significantly, such as real estate or stocks you have held for a long time, your beneficiaries could be subject to capital gains and other taxes potentially totaling 30% when they decide to sell.

However, the cost basis on property that is inherited after death is adjusted, or “stepped up,” to its current market value. For example, if you leave the family home to your children in your will or revocable trust, they will receive the property at its fair market value and can sell it immediately without any capital gains taxes. The only amount they would pay taxes on is any appreciation between the time they inherit the property and the time they sell it. So, if you own assets with a low cost basis, it can be better to leave those to your heirs via your estate versus gifting them during your lifetime.

Q. What is the best way to gift assets?

Gerry: How you give can be just as important as what you give. Often, making outright gifts isn’t practical because beneficiaries are too young or are not ready to receive large amounts of wealth. We often recommend using trusts to control the timing, size and conditions attached to those distributions. 

Bryan: In addition to providing more control over how and when your assets are distributed, trusts can be designed to help mitigate certain tax liabilities. Trust structures you may not have considered in the past—such as a dynasty trust, grantor trust or directed trust—might be especially useful with the higher exemptions now in place. 

Gerry: If you are considering gifting to grandchildren or subsequent generations, a Delaware dynasty trust can help ensure that distributions are not subject to generation-skipping transfer taxes. In other trust structures, such as grantor trusts, you (the grantor) are responsible for paying taxes on any income earned by the trust, allowing trust assets to effectively grow income tax free. Lastly, if illiquid assets such as real estate or ownership stakes in a family business are being gifted, using a directed trust allows you to retain control over how those assets are invested. 

Q. What should I do now?

Gerry: Re-examine your balance sheet and overall estate plan, particularly your current will and trusts, within the context of these higher exemptions. If you plan to make a particularly large gift, you may need to reevaluate your future cash needs and adjust your financial plan accordingly. But professional guidance is strongly advised. You don’t want capital gains or state-level taxes to inadvertently reduce the value of your gift. 

If you decide that gifting is an appropriate strategy, keep in mind that you don’t have to use the full exemption amount right away. But starting early could have advantages.

 

This communication is intended solely to provide general information. The information and opinions stated are as of March 22, 2018 and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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