Why gifts still matter

Paul Karlitz, Partner
July 12th, 2018 | 11:51 AM

With the federal gift and estate tax exemptions so high, making lifetime gifts to your loved ones may seem less critical than it might have in the past. But even if your wealth is well within the exemption amount, a lifetime gifting program offers significant estate planning and personal benefits.

TAX-FREE GIFTS

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include those within the annual gift tax exclusion — $15,000 per recipient ($30,000 for married couples) in 2018 — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Given recent changes to tax law, the estate tax may not seem that important now. After all, the 2018 exemption amount of $11.2 million is high enough to place the vast majority of families beyond its reach. But there are no guarantees that a future Congress won’t reduce that exemption amount. Lifetime gifts remove assets from your estate, including all future appreciation in value, providing some “insurance” against changes in the law down the road.

TAXABLE GIFTS

Taxable gifts — that is, gifts over the annual exclusion amount — can also provide advantages. Although these gifts are subject to tax (or applied against your exemption amount), they can reduce your tax liability by removing future appreciation from your estate.

When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell the assets without triggering capital gains taxes.

Assets transferred during life, on the other hand, retain your tax basis, so the recipients could end up with a large tax bill should they sell them. Note that some proposals to repeal the estate tax would eliminate the stepped-up basis rule for some or all assets. This would reduce or eliminate the advantages of holding assets for life.

BEYOND TAXES

Even if gift-giving offered no tax advantages, there are many non-tax benefits to making lifetime gifts. For example, it allows you to:

  • Witness your children or grandchildren enjoying the fruits of your labor
  • Help loved ones pay for education or medical expenses, and
  • Transfer business interests to the next generation.

By spreading out distributions over time from a controlled vehicle, trusts can help prevent your children or other heirs from squandering the assets. Also, they can provide incentives for desired behaviors — for example, a beneficiary may be required to graduate from college or remain gainfully employed. Trusts can also serve as a safety net by making assets available to your loved ones in times of true financial need.

GET WITH THE PROGRAM

Regardless of your level of wealth and whether you’re likely to be subject to estate tax, giving continues to offer substantial tax and non-tax benefits. To potentially take advantage of these benefits, talk to your Lenox Advisor and estate planning professional.

To learn more or speak directly with a Lenox Advisor, click here to contact us.

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