We believe with knowledge comes confidence. So we’ve assembled a collection of timely information and expert market commentary designed to give you new insight into the ever-evolving financial marketplace to help you build the confidence that comes from being a knowledgeable investor. Bookmark this page and check back for regular updates.
Klingman Insights
December 11, 2018
Strategies for Using Your $15,000 Annual Exclusion
With year-end approaching, it is a good time to consider your annual gifting strategy. While many of us are aware of the $15,000 annual exclusion, many people do not appreciate all of the gifting methods at their disposal and how to best utilize them. Lifetime gifting strategies can be very effective wealth transfer techniques and can help save a significant amount in estate taxes.
The Basics
An individual can gift a certain amount of money over the course of their lifetime – or at death – without having to pay estate tax (and tax free to the recipient). Under current law, this lifetime exemption, or basic exclusion amount, is $11.18M for an individual, or $22.36M for a married couple. While this threshold is relatively high for most families – it was raised under the Tax Cuts and Jobs Act – many advisors expect this number to come down in the future. Estate taxes are imposed at values in excess of this amount and can be as high as 50% when including state estate tax.
In addition, the IRS currently allows individuals to gift up to $15,000 to an unlimited number of people each calendar year without taxes being owed by the recipient (this amount typically increases every few years). A married couple can gift $30,000 to each of their children, grandchildren, or anyone else they choose. Importantly, these annual gifts do not count against one’s lifetime exemption.
There are a variety of gifting methods available. Which is chosen depends on one’s long term goals and objectives. Below are the main strategies to consider.
Strategies
Cash outright:
Writing a check is simple and gives the beneficiary immediate access to the gifted money. The recipient has full access and control of the funds and can elect to spend them or invest them as they choose. The donor does not have control of how these assets are spent/invested, and there is no protection from creditors.
529 contributions
529 plans are college savings plans that have additional tax benefits. Some states allow your contributions to be income tax deductible, and the invested assets grow and are distributed tax free if used for higher education. For larger estates, using the annual exclusion for 529s can be a drawback, since educational expenses qualify for the “Med-Ed” exclusion. In this case, you may want to pay for college out of pocket and use the annual exemption for trust gifting.
Gift to UTMA / UGMA custodial accounts:
State laws govern how UTMA and UGMA’s are established, providing a standard and simple way to gift to minors. Assets held in the custodial accounts can be invested by the donor, but will be distributed when a minor becomes of age (18 or 21).
Irrevocable Trust:
Gifting to an irrevocable trust has many advantages. You maintain some control over how the assets are invested, the trust has creditor protection and restrictions on how money is distributed to beneficiaries, and as the grantor you can pay the income taxes on behalf of the trust allowing invested assets to grow tax free out of your estate.
Conclusion
Tax strategy is an important aspect of long term financial planning. The IRS does not provide too many tax planning opportunities. When available, it is important to utilize them efficiently. Finding the right annual gifting strategy is not “one size fits all”; rather, each family should carefully consider the various options when deciding how to best use their annual exclusion.