Taxes are a focal point for the Biden administration and lawmakers in Congress, including estate and gift tax exemptions. The current lifetime exemption of $11.7M is in jeopardy of being significantly reduced, with a projected effective target date of December 31, 2021. The uncertainty may have you feeling pressured to make significant gifts before year-end—use it or lose it before the shift occurs.
Considering the potential changes, it is vital to keep a few things in mind before making large gifts.
Start with a comprehensive financial plan to ensure your remaining financial resources will allow you to live comfortably after making a gift. Once you gift, you can’t get those assets back, even if you have a change in financial circumstances later. The financial plan should help guide you on how much, if any, you can give away.
Once you determine the gift amount, avoid triggering 2021’s gift tax if your total lifetime transfers inadvertently exceed the threshold of $11.7M per person.
- Communicate all prior-year lifetime taxable gifts to your estate planning team that have reduced the lifetime exemption. This includes reported and unreported gifts.
- Indirect gifts, which include supporting an adult child, paying life insurance premiums for insurance owned by a trust, birthdays, vacations, zero-interest loans, and even forgetting to take required distributions out of a trust each year, can add up. These must be accounted for and included in your annual gift reporting.
- Valuations of business interests or other hard-to-value property transfers should be performed by qualified business and property appraisers. Trying to save on appraisal costs could cause you headaches later when filing the gift tax return.
- Have your tax advisor help you decide which assets might be the most tax-efficient to gift.
Other pending changes to the estate and gift tax law could affect your decision to gift. Currently, these estate planning techniques are still valid and can accomplish tax-efficient transfers of wealth.
- Intentionally Defective Grantor Trusts (IDGT) is an effective tool for making a part gift and part sale of an asset while maintaining some cash flow after completing the transfer. Low interest rates and valuation discounts can help transfer more value and future asset appreciation to your beneficiaries.
- Spousal Lifetime Access Trusts (SLAT) is also a great way to make a large gift to your spouse and have a failsafe for them to access the trust funds.
Consider using other techniques to transfer wealth without affecting your lifetime exemption. These strategies do not count as a taxable gift but can transfer considerable wealth over time:
- Annual exclusion gifts of up to $15K per person.
- Making direct payments to medical providers for medical bills or qualifying educational institutions for grade school through higher education.
- Making low-interest loans using the IRS’ Applicable Federal Rates for the term of the loan.
- Selling your business or other property to your children at today’s value on a low-interest loan using AFR rates—can effectively freeze the value for estate tax purposes and still provide you with a stream of income.
Aldrich Wealth’s Advice
We recommend maintaining detailed records around your gifting activities and working with a trusted advisor to develop a financial plan. Take advantage of the current tax environment for significant gifts and, at minimum, evaluate wealth transfer options that will not affect your lifetime exception amount. When making large gifts, your goal should be obtaining the best (and lowest possible) value while feeling confident that the valuation will be defensible should the IRS decide to take a closer look.
Gifting requires careful planning and consideration. If you are thinking about gifting, take the time to meet with our Aldrich Wealth advisor teams to ensure your estate and gift tax plans are appropriately executed and ensure your strategy is relevant for the current tax year.
Aldrich Wealth LP, (“AW”) is an investment advisor registered with the U.S. Securities and Exchange Commission. AW provides wealth management services where it is appropriately registered or exempt from registration and only after clients have entered into an Investment Advisory Agreement confirming the terms of the client relationship, and have been provided a copy of AW’s ADV Part 2A brochure document. The information contained in this document is provided for informational purposes only, is not complete, and does not contain material information about making investments in securities including important disclosures and risk factors. Under no circumstances does the information in this document represent a recommendation to buy or sell stocks, bonds, mutual funds, exchange-traded funds (ETF’s), other securities, or investment products.
All tax advice and tax-related work is performed by Aldrich CPAs + Advisors LLP, an affiliate of the Aldrich Group of Companies.