For many people in the United States, the holiday season is a time for making gifts to family members and other loved ones. Larger gifts can be made using the federal Gift Tax Exemption and Generation-Skipping Transfer (“GST”) Tax Exemption. However, annual exclusion gifts must be made before December 31, so now is the time to make your 2017 annual exclusion gifts if you haven’t already done so!
Annual Exclusion Gifts
The annual exclusion amount is the maximum amount that you can give to any single recipient during a calendar year without incurring gift tax and without using any of your lifetime Gift Tax Exemption. For 2017, the annual exclusion amount is $14,000 (or $28,000 if you and your spouse choose to “split” gifts). However in 2018, the annual exclusion amount increases to $15,000 (or $30,000 if you and your spouse choose to split gifts).
Annual exclusion gifts can be made to anyone, although children and other descendants are the most common recipients of these gifts. Annual exclusion gifts can also be made to certain trusts and 529 plans instead of being made outright to an individual. If the recipient has earned income, he or she could use a portion of your annual exclusion gift to fund a Roth IRA, which would allow those funds to grow income tax free for the recipient’s lifetime.
The annual exclusion amount applies to each person to whom you make a gift. For example, if you decide to make gifts of the full $14,000 annual exclusion amount to 10 different people this year, you can remove $140,000 from your taxable estate without paying gift tax or using any of your lifetime Gift Tax Exemption.
The annual gift tax exclusion amount does not carry over from year to year. Annual exclusion gifts made after December 31 will count against your 2018 annual exclusion amount. Note that a gift by personal check is not considered complete until the bank clears the check. Therefore, any personal checks for 2017 gifts should be given early enough that the checks can be cleared before the end of the year. Alternatively, you can use wire transfers or cashier checks.
Tuition and Medical Care Gifts
In addition to annual exclusion gifts, you may make tax-free gifts to your family members and others by paying their tuition and medical expenses. These payments will not count against your annual exclusion amount or your lifetime Gift Tax Exemption as long as they are made directly to the school or health care provider.
Larger Gifts Using Gift Tax Exemption and GST Exemption
If you would like to make larger gifts, the Gift Tax Exemption and GST Tax Exemption are each $5.49 million in 2017 and will increase to $5.6 million in 2018. If gifts are made in excess of these exemptions, the maximum rate for estate, gift and GST taxes is 40 percent for 2017 and 2018. Unlike annual exclusion gifts that can be made each year, the Gift Tax Exemption and the GST Tax Exemption are amounts to use during your lifetime or upon your death. These exemptions are reduced by your cumulative gifts during your lifetime. Once you use a portion of your Gift Tax Exemption or GST Tax Exemption, it is gone forever, so please speak with your estate planning lawyer before making any large gifts.
Remember that when you make a gift of an asset that may increase in value, any future appreciation and income that the asset generates will also be removed from your estate, thus increasing your tax savings.
Other 2017 “Treats”
We circulated a Legal Update in July 2015 that indicated the Internal Revenue Service was working on proposed regulations under Section 2704 that could impact the use of minority interest and lack of marketability valuation discounts for certain family-owned entities. The IRS did propose such regulations on August 4, 2016, but the proposed regulations were withdrawn on October 20, 2017 as regulations targeted by the Trump administration that “are unnecessary, create undue complexity, impose excessive burdens, or fail to provide clarity and useful guidance.”
As you may be aware, the House of Representatives passed the Tax Cuts and Jobs Act in November 2017, which increases each of the federal Estate, Gift and GST Tax Exemptions to $10 million indexed for inflation (which would likely result in an $11.2 million exemption per person in 2018). The Tax Cuts and Jobs Act would repeal the Estate and GST Tax in 2024, but the Gift Tax would be preserved. The step-up in basis for assets at a person’s death would be preserved even after the Estate Tax is repealed. The tax reform bill passed by the Senate on December 2, 2018, also increases the exemptions to $10 million indexed for inflation from 2011 but does not repeal the Estate or GST Tax. At the time of this update, no new tax law has been passed. We will provide an additional Legal Update if and when the new tax law is passed.
If you have used all of your Gift Tax Exemption and are considering making large gifts and paying gift taxes in 2017, you should wait to see if the tax reform bill becomes law before making such gifts to potentially use the increased Gift Tax Exemption.
As always, it is best to consult your estate planning lawyer or tax advisor about Gift Tax filing obligations (especially for split gifts), 529 plan gifts and large gifts that utilize the lifetime Gift Tax Exemption before making such gifts.