Plan Before You Give: 3 Gifting Strategy Tips

Are you thinking about giving some of your assets to friends, family or other loved ones? That could be a wise idea. Gifting can be an effective way to help those who mean the most to you, and it can be a powerful estate planning tool. When you gift assets, you remove them from your estate, thus limiting their exposure to probate and estate taxes.

Gifting can also bring its own challenges, however. Taxes are often an unfortunate consequence of a gifting strategy. You may not know that the gift tax exists or how it works. Depending on the size of your gift, you could face up to a 40 percent gift tax.1 If you fail to pay the tax, the recipient may face additional tax obligations.

How can you make your gift without creating additional tax liability? And how do you know if you should worry about the gift tax? Below are a few important facts to keep in mind as you develop your gifting strategy:

Be aware of the annual exclusion.

You can give a certain amount each year and not face any gift taxes. For 2017, each individual has a gift tax exclusion of $14,000. That means you can gift as much as $14,000 per year per recipient without facing gift taxes. For example, if you have three kids, you can give each child $14,000 in 2017, for a total of $42,000 in gifts. If you gave an individual more than $14,000, however, you would face gift taxes on the excess amount.1

Married couples can take advantage of a higher exclusion amount. Remember, the exclusion is $14,000 per individual. That means each spouse can gift up to $14,000, even if the funds are going to the same recipient. So a married couple could give as much as $28,000 to each individual without facing gift taxes.1

Maximize education and medical gifting opportunities.

It’s possible that your gift recipient will use the funds to pay for education or medical bills. If so, you may be able to give more than the annual exclusion amount and still not face gift taxes. The IRS allows tax-free gifts for educational and medical purposes.

Generally, gifts of any size are excluded from the gift tax if they are intended for education or medical expenses. The catch is that the gift must be made directly to the educational or medical institution. In other words, if you want to help with a grandchild’s tuition, you should pay the school directly rather than give the money to the child’s parents.

Understand how gifts impact your estate.

Even if your gift exceeds $14,000 and isn’t for education or health care, it’s still possible to avoid the gift tax. You can simply apply the excess to your unified lifetime exclusion amount. The lifetime exclusion is the total amount of assets that one person can transfer to others without facing gift or estate taxes. The exclusion is currently set at $5.34 million.1

Keep in mind that the exclusion counts toward both gift taxes and estate taxes. That means if you use some of the exclusion for gifts during your lifetime, the exclusion amount for your estate would be reduced. For example, assume you gift $1 million. At the time of your death, your estate tax exclusion would then be $4.34 million.

Ready to develop your gifting strategy? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.

1 https://www.forbes.com/sites/ashleaebeling/2016/10/25/irs-announces-2017-estate-and-gift-tax-limits-the-11-million-tax-break/#1c2ac0b33b70

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17105 – 2017/10/30