Gifting Earlier Rather Than Later Can Reap Big Tax Benefits

Hundred-dollar bills fanned out in a gift box. — (Image credit: Getty Images)

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which implemented numerous changes to our tax system affecting both individuals and corporations.

Notably, the federal lifetime gift and estate tax exemption increased from $5.49 million to $11.18 million per person in 2018 (it’s $13.99 million in 2025). This significant change created many planning opportunities for high-net-worth individuals and families. However, the TCJA passed through the budget reconciliation process, and as a result, many of the changes are set to expire, or “sunset,” on December 31, 2025.

Absent action from Congress to extend the expiring TCJA provisions, the federal gift and estate tax exemption will be reduced from $13.99 million to $5 million, indexed for inflation (projected to be about $7 million per person).

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

President-elect Donald Trump campaigned to extend the various tax cuts passed in 2017, and with a Republican-controlled Congress, he may be able to fulfill that promise. A simple majority of both chambers will be required to pass tax legislation through another budget reconciliation bill. While Republicans have the majority, we will have to wait and see what legislation is introduced and whether it has majority support.

Planning opportunities while we wait

If individuals have the assets to do so and are comfortable making gifts that will use up their remaining exemption, they need not wait to see what happens with the TCJA in the new year. Lifetime gifting is impactful because the asset that is gifted is removed from the donor’s estate and all future appreciation on that asset grows outside of the estate, so gifting earlier rather than later can reap big benefits from a tax perspective.

Furthermore, due to the "anti-clawback regulations" passed in 2019, those who take advantage of the full exemption amount now will not face repercussions if the exemption does sunset. These regulations provide that a decedent’s estate tax liability will be computed based on the exemption amount at the time a completed lifetime gift was made rather than the exemption amount at the time of death. This means that the 74% of private business owners with the desire and ability to make lifetime gifts and maximize their available exemption before the sunset should seriously consider doing so.

However, the tax tail should not wag the dog. There are many other important things to consider before making a lifetime gift. First, individuals should work with their advisers to ensure making a gift to use their remaining exemption will not negatively impact their personal financial picture. Financial planning software can be a useful tool to project future expenses — both anticipated and unexpected — and can help determine how much they can afford to give away while maintaining their lifestyle.

Second, donors should consider the impact of the gift on the recipient and whether they have hopes, expectations or concerns that might influence how they make the gift. Taxable gifts (those that will use the donor’s available exemption) may be made outright, in trust or a combination of the two. Trusts are often a preferred vehicle for those looking to make larger gifts because of the management, oversight and creditor protection provided by a trust as opposed to an outright gift.

Deciding what to give

If individuals are ready to move forward with making a gift, they will need to work with their advisers to determine what to give. Gifts may be made using cash, stock or complex assets, such as an interest in a privately held business or real estate. Determining what to gift depends on several factors, including the donor’s liquidity, the need for particular assets in the future, the willingness to give up control and income tax considerations. There are benefits and drawbacks to each, so it is important to walk through all available options with your adviser.

Those who are not yet ready to commit to a gift can certainly wait until we get closer to the sunset deadline and have a better idea of where things stand — but there are steps even those on the fence can take now to avoid a mad rush next year. If the gift will be made to an existing trust, donors should review the terms of that trust and confirm that it is the proper entity to receive the gift. If a new trust is created, individuals should engage their attorney now to begin the drafting process and ensure they have enough time to finalize the documents and get accounts open before making a gift.

Individuals should also work with their advisers to develop a plan of how the gift will be made (e.g., cash, stock or another asset), confirm whether an appraisal will be required and begin to consider how the gift will be communicated to the beneficiary.

Things to consider after the sun has set

People who are looking to reduce their estate tax exposure after exhausting their lifetime exemption still have plenty of opportunities to do so. Planning techniques such as grantor retained annuity trusts (GRATs), sales to grantor trusts, intrafamily loans and charitable gifts do not count against the gift and estate tax exemption and can be useful in removing assets from an estate. In addition, individuals may make annual gifts ($18,000 per recipient in 2024 and $19,000 in 2025) and pay tuition and/or medical expenses on behalf of anyone (so long as payments are made directly to the institution) without incurring a gift tax.

Even those who have completed their gifting may not be done yet. If trusts were created, they should discuss a plan for trustee succession and consider drafting a side letter of intentions to guide trustees regarding discretionary distributions. They should also revisit their basic estate plan (wills and revocable trusts) to confirm that it is still aligned with their wishes. Finally, individuals should continue the work of communicating their estate plan to their loved ones — as well as the values that informed the plan — to help prevent unwanted surprises in the future.

Neither, Brown Brothers Harriman, its affiliates, nor its financial professionals, render tax or legal advice. Please consult with an attorney, accountant and/or tax adviser for advice concerning your particular circumstances.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

TOPICS

Nicole Jackson-Leslie provides guidance to high-net-worth families and individuals throughout all aspects of their estate planning, including generational transfer of family wealth, business succession, philanthropy, next-generation education and tax minimization. Prior to joining the firm in 2018, she practiced at the law firm of Choate, Hall & Stewart LLP in Boston.