Thoughtful Gifting Part 2: Striking the Right Balance: How to Make Large Gifts Without Outliving Your Wealth

08.18.2021 - Nita S. Vyas, Trust Counsel

Thoughtful Gifting Part 2:This is the second piece in a four-part series on the federal gift and estate tax, what the future might hold for the exemption amount, and why you should consider making large gifts in 2021.

Thoughtful Gifting Part 1
Thoughtful Gifting Part 3
Thoughtful Gifting Part 4

If you are thinking about making large gifts this year, you’re not alone.Today, anyone can give away as much as $11.7 million ($23.4 million for couples) without being subject to the 40% federal gift and estate tax. But this tax-free exemption amount is scheduled to be cut in half in 2026. And Congress could reduce it even sooner.

Therefore, the main challenge if your estate is subject to estate tax is deciding how much to give away without jeopardizing your own financial future.

1. Set Aside What You Need

The first step is to determine how much you’ll need to live comfortably for the rest of your life. Make a list of the assets you’ll need in the future. Also consider setting aside any holdings you just aren’t ready to give up yet, such as your home or a treasured art collection, for example. You may also want to hold onto any assets that would be difficult or costly to transfer, such as private investments with lock-up provisions or retirement account assets, which typically trigger income taxes.

2. Decide How Much to Give Away

After you have set aside what you need for your lifetime, you will want to determine how much of your remaining assets it would make sense to give away to minimize or avoid the 40% federal estate tax.

If you have already used the bulk of your federal gift and estate tax exemption amount, it should be relatively easy to identify the possible tax benefits of lifetime gifting. For example, if you and your spouse have a $50 million estate and have already gifted a total of $20 million of your exemption, you would have $3.4 million of the exemption amount left ($23.4 million exemption minus $20 million gifts you’ve made).

The question then becomes: Can you afford to give the remaining $3.4 million tax-free amount away? If you can, your estate could possibly save about $1 million in tax payments if Congress ends up cutting the exemption amount as expected.

However, your decision may be less clear-cut if you and your spouse have not previously made gifts that count against your exemption. In this case, the question becomes whether you should give away $23.4 million to take advantage of the entire exemption amount. But that would be almost half of your wealth in this example.

This doesn’t mean you should dismiss the idea of making large gifts. Gifting can offer tax benefits that have nothing to do with the estate tax exemption amount. For example, your gift might shift the appreciation of certain assets, and capital gains taxes, to your beneficiaries. Or you might want to take advantage of certain estate-planning techniques that could be eliminated by Congress in the future.

If your estate is valued at less than $10 million, you might still want to give away assets this year in order to take advantage of record-high exemption amounts for the federal gift and estate tax.  

Finally, there are potential estate tax benefits to consider at the state level. Currently, 17 states and the District of Columbia apply their own estate tax. If you live in one of these states, gifting in 2021 could move assets out of your estate and eliminate the state-level tax that would apply if those assets transferred at your death.  

In addition, Connecticut is the only state that imposes its own gift tax. So, if you live in Connecticut, you might be reluctant to give away assets that exceed the state’s current $7.1 million exemption amount. But in many cases, paying the state’s gift tax can be preferable to paying estate tax, even though gift tax is payable now and the estate tax would apply at some point in the future.

3. Consider Placing Gifts in a Trust

Large gifts tend to be made in trust rather than given outright, mainly because a trust allows you to specify when and how assets are transferred to your beneficiaries. This may be especially important if your beneficiaries are young or your gift is designed to benefit multiple generations. Trusts can also ensure property in your estate is managed efficiently and protect assets from some creditors of your beneficiaries, including ex-spouses.

Most importantly, perhaps, you can compound the estate tax savings of your gift by applying the generation-skipping transfer (GST) tax exemption to your trust. Currently, the GST tax exemption is $11.7 million for individuals and $23.4 million for married couples—the same amounts as the federal gift and estate tax. But assets held by a trust are not subject to the federal estate tax or GST tax. And while an outright gift might be subject to the federal estate tax when your beneficiary dies, a professionally designed GST-exempt trust can avoid that tax burden for multiple generations.

Trusts also offer flexibility. For example, if you are concerned that your spouse might need access to funds in your trust, you could include provisions in the trust document to allow your spouse to access those funds. You might also give your spouse the ability to determine how the trust’s assets pass to future generations—and extend the same ability to generations after that. In addition, your trust document can incorporate charitable giving into your estate plan and ensure that the right people are involved in making decisions, now and in the future.

We Can Help You Strike the Right Balance

You don’t need to make decisions about gifting on your own. Fiduciary Trust can help you identify assets that make the most tax-efficient gifts and ensure your gifts align with your unique goals. 

This communication is intended solely to provide general information. The information and opinions stated 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.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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