One of the best ways to minimize your taxable estate is through planned gifting. Anyone who may be subject to a federal or state estate tax, or a state inheritance tax, should at least consider a gifting plan.
Can You Afford to Make Gifts?
The first item to think about is – can you afford it?
This is not always an easy question because you may be worth a lot of money, but you might not have a large income to cover your annual expenditures.
Accordingly, sometimes the best items to gift are items that do not produce a lot of income, but are worth a lot of money for estate tax purposes. Vacation homes, valuable art collections and a minority interest in a business are all perfect examples of this.
How Much Should You Gift and How Should You Benefit?
Once you figure out whether you can afford to make a gift, the second question is how much to gift and who do you wish to benefit. These go hand in hand because often times you only wish to benefit certain people or certain charities by a set dollar amount rather than by everything you can afford to give away.
When trying to calculate how much to gift, valuation of the gift becomes crucial. It is beyond the scope of what I wish to discuss here, but be aware that certain gifts may valued at less than you think because discounts should be taken if the gift is not freely marketable and/or the donee does not have much control over the asset after it is received.
Additionally, tax law often plays a key role in how much you give away. Even if you can afford to give away $2,000,000 to charity or to your grandchildren, it may be more beneficial for tax reasons to make smaller gifts over a number of years rather than a large lump sum gift.
When is the Best Time to Make a Gift?
This leads us to the third item that we must think about in a gift plan is the timing of the gift. (For more information on this, see my earlier blog post on timing.)
You may be aware that the federal government allows you to gift away a certain amount every year (currently $13,000) without a gift tax consequence. Moreover, you may gift away up to $1,000,000 before there is any out of pocket gift tax consequence because you are entitled to a $1,000,000 federal gift tax exemption.
Any good gifting plan is going to try and make maximum use of your lifetime gift tax exemption, annual exclusion amounts as well your ability to pay for another person’s educational or medical expenses without incurring any tax consequences. (There is technically no gift if you make payments, for the benefit of another person, when such payments are made directly to certain educational institutions or medical care givers.)
Due to the annual exclusion allowance, practitioners frequently encourage clients to make gifts to their loved ones over the course of many years
What is the Best Way to Make a Gift?
The final item to think about, is the manner in which the gift is made.
There are thousands of different ways to make gifts. You can make gift directly to the person or charity you wish to benefit.
You can make a gift via a trust (and there are many different trusts such as insurance trusts, charitable lead or remainder trusts, dynasty trusts with or without withdrawal rights, qualified personal residence trusts, etc.).
You can make gifts to a 529. You can give away partial ownership of a property. You can have an indirect gift by “giving” money to a company in which you are not the sole owner and not getting anything in return for that extra contribution. You can give up a power that you were entitled to.
Once you have figured out what you can afford, who you want to benefit, how much you want to give, when to make the gift and how to make the gift – then you have a true planned gift.
NOTE: All items discussed here assume that you are a US citizen or permanent resident alien.