Tax Planning Strategies - Gifting During Your Lifetime

​If you have been fortunate enough to acquire a substantial amount of wealth during your lifetime, you might be inclined to look for ways to share that wealth with those individuals you love, as well as reduce your potential estate tax.

Only you can decide whether your loved ones are responsible enough to manage a monetary gift at this time, but if you would like to see them enjoy some of the fruits of your labor while you are alive, here are a few things you should consider before making a financial gift:

1. Under current law, you may gift up to $15,000 (the annual exclusion amount) to any person in a year without having to file a gift tax return or pay gift taxes to the IRS. If you gift over this amount to any one person during the year, then something called your lifetime exemption comes into play. The current lifetime exemption amount is $11.4 million, but will increase to $11.58 million in 2020. Therefore, if a person makes a gift over $15,000 to an individual in a year, they use up a portion of their lifetime exemption, which they document with the IRS by filing a gift tax return, even if there is no gift tax due. If an individual gifts more than $15,000 to an individual in a year and has used up their lifetime exclusion amount then, that person will face a hefty 40% tax on the amount of the gift valued over $15,000. 

2. If you are married, you and your spouse may each gift up to $15,000 to the same person in the same year, without gift tax consequences. The gift recipient does not need to be related to you.
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3. What if you want to make a financial gift to your spouse? You are in luck! Gifts to spouses are generally unlimited and require no gift or estate tax payment. An exception to this rule: If your spouse is not a U.S. citizen, you are limited on the amount that you can gift tax free.

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​4. If you wish to gift to a charity, again, no gift or estate tax is due, regardless of the amount of your gift. You may wish to consider using a donor-advised fund that allows donors to make an unlimited donation to the donor-advised fund. With this type of donation, the donor can deduct the full amount of the charitable donation in the same year on his/her taxes, but the distribution of the donated funds can be made at a later time. In doing so, the donated money may have a chance to grow before the distribution is made to the charity. PLEASE BE AWARE, that the charity must meet certain qualifications under the IRS rules for this type of treatment. Check with the charity prior to making a distribution to see if they qualify.

5. If you wish to gift to a younger person but have concerns about their ability to responsibly manage the financial gift, you may wish to consider making a gift of tuition on behalf of the younger person. The gift must be paid directly to the college or other educational institution in order to avoid a gift tax. 

6. Perhaps you have a child who has incurred large medical expenses. You may also make an unlimited gift to cover medical expenses, but the payment must be paid directly to the hospital or medical professional in order to avoid any gift tax.

7. If you make a monetary gift or a gift of property within five (5) years of needing full time nursing home care, those gifts will be considered when determining your eligibility to receive Medicaid benefits.  

8. If you gift assets such as securities or real property, make sure your gift recipient consults a tax advisor before later selling such asset. If the gifted assets have appreciated in value prior to the sale of the gift, the recipient of your gift may have to pay capital gains tax.  

Gifting of assets during your lifetime can be an extremely rewarding experience. You can either make an outright gift, with no strings attached, or you can give a conditional gift that requires the recipient to accomplish certain goals before receiving the gift. Conditional gifts generally are not recommended unless the intended recipient has a track record of irresponsibility or is a minor. If your intended recipient is a minor child, you may wish to consider establishing an irrevocable trust that can be managed by a separate trustee to make distributions for the benefit of the child’s health, wellness, maintenance or education. You may stipulate when and in what amount the child may withdraw from the trust fund. 

In addition to irrevocable trusts to benefit minor children, you could also consider donating funds to a 529 plan savings account that can help pay for their education. If you are wanting to quickly decrease the size of your asset holdings, you and your spouse can front-load five (5) year’s worth of your annual gifts to the child’s 529 plan, for a total of $150,000, if the gifts are made in 2019. These educational savings plans also may be used to pay for K-12 tuition with slightly different stipulations.

In addition to the emotional satisfaction of giving during your lifetime, by decreasing your overall net worth you are potentially lessening your future estate tax. Lowering the amount of your estate tax is yet another way you can provide a more substantial gift for your heirs after your death.

If you have an abundance of wealth beyond your needs, gifting liberally during your lifetime can make the world a better place. Just be sure to consult with your accountant and an estate planning attorney who is well-versed with gifting rules before making a gift to ensure you do not inadvertently create a taxable situation for yourself or your loved ones. 
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If you have a question about gifting, contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and the National Academy of Elder Law Attorneys (NAELA). We focus our practice on providing clients with the best legal advice on estate planning, Medicaid and long-term care planning, special needs planning, business formation, family business/small business succession planning, probate, trust administration, real estate, and related matters.