December 17, 2021 glacierinvest

Since Christmas is one week away, gifting is a great topic to discuss here this week. to be clear, I don’t mean gifting in the sense of Christmas or birthday gifts although I suppose the gifting I’m referring to could fall into either of those categories. I’m referring to gifting as it relates to tax and estate planning with the objective of creating the most efficient transfer possible of your assets to your heirs.

Gifting can be a valuable estate planning tool that can ensure your assets get to the people you want to receive them and can also minimize the taxes you pay if done properly. Whenever you transfer any kind of property with value to somebody else without an exchange for adequate consideration, you have made a gift. Any gifts made with a value under $15,000 are tax free and the assets are removed from your estate, reducing the overall taxable value of your estate. Any gifts over $15,000 are subject to gift taxes. Importantly, if you are married you can “gift-split” so that $30,000 can be given tax free to an unlimited amount of individuals (note this is the tax law for 2021 and is subject to change). 

In general, the best types of property to gift include:

  • Property that is likely to appreciate in value
  • Property that has a low gift tax value and a high estate tax value (e.g., life insurance policies)
  • Income producing property when the recipient is in a lower income tax bracket than you
  • Property that has already appreciated in value where a sale is contemplated, and the recipient is in a lower tax bracket
  • Appreciated property as a gift to charity
  • Property that is located in a state other than the owner’s state of domicile

Some of the best types of property to keep include:

  • Highly appreciated property that is likely to be sold after the owner’s death
  • Property that, if sold, would result in a loss
  • Depreciating income property

You may be asking yourself how could I gift only $15,000 (or $30,000, if married and gift-split) for some of the types of property mentioned above? That’s a great question. The good news is there’s a tax credit called the Uniform Gift and Tax Credit that enables you to gift up to $11,700,000 ($23,400,000 for married couples) in assets during your lifetime without having to pay gift or estate taxes. Keep in mind, any assets left for beneficiaries after an individual dies may be subject to estate taxes. Additionally, it usually doesn’t make sense to gift all your assets prior to your passing. Any leftover amount of the unified credit that is left over at your passing will be used to offset any estate taxes owed. 

If you do end up making a taxable gift in excess of the annual allowed exclusions ($15,000 individual or $30,000 married with gift-splitting) you are required to file Form 709 with the IRS. On this form, you’re able to apply the exclusion and only pay taxes on the balance, or you can apply the gifts you made to your lifetime unified credit to potentially avoid the gift tax entirely. There are various factors that go into developing and implementing effective gift strategies that I’m unable to go into here due to lack of space. It can be a very complex process. Suffice it to say, with adequate planning you could transfer a substantial amount of assets to your heirs over the course of several years at no tax consequence to you or to your heirs. These transfers would avoid probate and reduce the amount of your estate which could lead to lower estate taxes, if any are due.