Friday, October 16, 2020
The federal gift and estate tax exemption are at a record high of $11.58 million per individual, set to roll back to $5 million (adjusted for inflation) in 2026 and depending on this year's election, it could roll back even sooner.
It may be time to take advantage of the current exemption, but first it may be helpful to consider some pros and cons of lifetime gifts.
One major advantage of lifetime gifts is that gifting can reduce your estate tax bill. "A current gift of property likely to increase in value during your lifetime not only removes the property from your estate but also removes all post-gift appreciation..."
Another advantage is the use of two lifetime "gift-tax free" transfers that will not use up your gift tax exemption. The first one, the federal annual exclusion gift, will allow you to make tax-free gifts each year to any number of individuals up to a certain amount. Those numbers for 2020 are $15,000 per recipient. The second transfer allows you to make direct payments of tuition or medical expenses for another individual.
There are also number of non-tax benefits of lifetime gifts. For example, gifting property will allow the beneficiary of your gift to enjoy gifted property upon receipt of the gift.
One obvious disadvantage of lifetime gifts is that you will lose control over any assets that you give away. There are certain ways to structure a gift that will allow you access to gifted property (using a trust to gift to your spouse) just in case you need access to the funds.
Another disadvantage may arise with gifts of appreciated property. If the gift depreciates or fails to to produce a "sufficient spot-gift investment return" there would be a disadvantage to making the gift.
State laws can also hinder the normal advantages to making gifts.
See Ada Clapp, J.D., T&E TALK: The Pros and Cons of Lifetime Gifts, Berdon L.L.P., September 29, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.