TAX PLANNING

Two Reasons to Make Annual Exclusion Gifts Early in the Year

02.02.2020 - Bryan Kirk

Two Reasons to Make 2020 Annual Exclusion Gifts Early in the Year

As a reminder, the tax code provides an incentive to make gifts–and not just to charity. This year, under the annual exclusion from federal gift taxes, any individual can give up to $15,000 to any other individual with no tax consequences - no gift tax to be paid, no gift tax return to be filed, and no use of any exemption for federal gift and estate taxes ($11.58 million per individual and $23.16 million for married couples in 2020). And the annual exclusion gift can be in addition to any direct payments of medical and educational expenses that you make for someone else without any limit.

If you are planning or thinking about taking advantage of the annual gift tax exclusion, there are two big reasons to do it sooner rather than later.

Transferring Assets Right Can Take Time

The gift tax exclusion is an annual amount. To take advantage of the $15,000 exclusion amount for 2020, your gift needs to be completed in 2020. And “completing” a gift for tax purposes is not as simple as handing someone a check.

In general, a “completed gift” requires you to give up control of the asset, including any ability to pull it back. Short of putting cash in someone’s pocket, this takes time. For example, if you gave someone a check for $1,000 at a New Year’s Eve party on December 31, that’s not going to be a gift in 2020 since the check will not clear until 2021.

Giving securities also takes time and can involve complex rules to determine if the gift is completed in the same year if you cut it close and make the gift late in the year. It’s better to avoid any issues by initiating any security transfers that you are contemplating earlier in the year. And if you’re gifting assets in a trust, remember the annual exclusion only applies if the beneficiary has the right to withdraw the assets for a period of time – which should occur in the current year. For example, if the beneficiary’s withdrawal right is to last for 30 or even 60 days, that extra time needs to be accounted for.

Turn Your Gifts into Something More

Usually, part of the donor’s objective is to transfer wealth in the most efficient way possible. Obviously, this will require consideration of the structure of the gifts and their tax effects. The donor’s goals also ideally involve what a beneficiary does with the gift and how the gift fits into a beneficiary’s own financial plan. Even where a donor is fine with a beneficiary spending some of a gift on herself or her family, the donor usually wants that spending to be responsible and the donor might want a beneficiary, over time, to grow into an active steward of the family’s wealth as transfers occur, and not remain merely a passive recipient.

This second goal requires engagement and the necessary conversations between donor and beneficiary. A gift can be a point of engagement that allows a donor to find out where a beneficiary is in his financial life, and to help him mature. The conversations may also help you in shaping your wealth transfer strategy to be most impactful for your beneficiaries.

For example, you may discover a beneficiary is using your gifts to pay medical or educational expenses that you could be paying directly in addition to your annual exclusion gift. Or you may discover a beneficiary is paying off credit card debt that would not have been incurred if your gift was made sooner or if the beneficiary had help with developing a budget. Or you may find that a beneficiary is using your gifts to make gifts herself, creating an opportunity to work with the beneficiary to establish and be all part of an overall family giving plan.

Ultimately, the engagement between you and your beneficiary can help in developing your overall estate plan. This may include gifts in excess of the annual exclusion amount. It also includes family governance, and how family members partner with your professionals, like Fiduciary Trust, in the active stewardship of family wealth.

Whether you’ve been making annual exclusion gifts for years, or are considering whether you should, we can help you get the timing and the impact right for your family.

By Bryan Kirk and Nita S. Vyas

 

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