Basic rule: the more you give away, the smaller your estate and, therefore, the smaller your tax liability. If you’ve got a lot of wealth, this is a good time for you and those you want to make gifts to. The sooner you exploit this, the more you can give. It means that there’s less of a chance 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 large 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 is $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. The current law is scheduled to lapse on January 1, 2026 with the exemption reverting to 2018 levels ($5.6M adjusted for inflation). In addition, economic conditions such as increased US deficits or changes in political priorities may result in even lower exemptions resulting in your heirs paying significant taxes. Now is the time to use the favorable exemptions and laws to transfer wealth during life through gifting.
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 known as a "grantor" trust), where he or she is responsible for any taxes on income that the gift generates.
Sit down with your estate planning attorney to review your giving strategy and the tax implications. It’s a great time for giving.
One of the key techniques we have been using at Family Estate Planning Law Group is our Massachusetts Standby Gifting Trust to reduce Massachusetts and federal estate taxes. To learn more about the MA Standby Gifting Trust and how you can take advantage of the favorable transfer laws, check out our client events in October, by clicking here.
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Reference: The Street (February 7, 2019) “This Is the Golden Age of Tax-Free Gift Giving”