With the year’s end approaching, it is important to remember that there is an annual gift tax exclusion available to each and every tax payer. The exclusion is not limited to the wealthy, and it is also not limited to one exclusion per family. It is possible for a husband and wife to both utilize the exclusion and double the amount they are able to give to their children, grandchildren, nieces, nephews, or anyone else they would like to benefit.
There are many factors to consider when determining if it makes sense to use the gift tax exclusion, which should be discussed with your tax professional. Below are examples of how we have seen this exclusion used to maximize gifting:
Irrevocable Life Insurance Trust
Funding an Irrevocable Life Insurance Trust (an “ILIT”) and gifting the premium to the beneficiaries on an annual basis (this can be a new policy or, in some cases, an existing policy with an ownership change). When the life insurance owner is changed, it is important to make sure that the cash value of the insurance does not go above the gift tax exclusion in the first year. There are added benefits to forming an ILIT, such as having the death benefit removed from your taxable estate upon your death.
Forgive Old Debts
Using the annual gift tax exclusion to forgive old debts of family or friends. In this scenario, it is important to create documentation that will show that the debt has been forgiven to avoid later confusion for your estate.
Using the annual gift tax exclusion to transfer stock in a privately held company to future generations or management. In this scenario the person making the gift would likely need to make multiple gifts over a number of years to ensure the entire company can transfer. However, this is a good way to start getting some of the company into the hands of the next generation.
Contribute to a 529 Plan
Making contributions to your grandchildren’s 529 plan for their future college or trade school education.
These are just a few of the examples we have seen in our office in the past of ways families have taken advantage of the annual gift tax exclusion. This year the exclusion is remaining at the $14,000 per person per gift. This means if there is a couple with two children and four grandchildren, the couple would be able to gift $14,000 to each of their children, all of their grandchildren and even the spouse of their children for a total gift this year of $224,000. It is also important to note that the annual exclusion does not count towards the lifetime gift exemption. The IRS has indicated that the exclusion is going up to $15,000 per person per gift for 2018.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Daniel C. Regan | Outside General Counsel, Mergers and Acquisitions, Small Business Regulation, Nonprofit Representation and Regulation, ERISA Regulation, and Estate Planning
With a background that straddles the financial and legal realms, Dan is uniquely positioned to help clients navigate day-to-day needs as well as unforeseen challenges and opportunities. If you need assistance with a related matter, contact Dan.