31 May 2016

Estate Planning Basics Part III: Gifting

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I often meet with clients who believe they are able to just “give away” something to a friend or family member without any consequence. Today I will not only make an effort to bring some clarity to that thought, but suggest how you can use gifting to your advantage when planning your estate. Unfortunately, in order to bring the most value to this topic, I will also need to incorporate the topic of my fourth blog post (estate taxes); therefore, the four part installment will now be shortened to three.

Throughout this article, we will first discuss the difference between “Annual Exclusion” and “Lifetime Exemption” amounts, how gifting throughout one’s lifetime is tied to those topics, and how to use gifting to your advantage. In order to establish a good knowledge base, let’s first discuss the difference between Annual Exclusion and Lifetime Exemption amounts.

Each year, the IRS allows you to gift up to $14,000 ($28,000 between you and your spouse if you are married) worth of money or property to someone without any consequence. For example, let’s pretend that this holiday season, you are feeling extremely generous, and decide to give gifts of $14,000 to each of your 10 nieces and nephews. Despite the fact that this action involves you giving away $140,000 in one year, it is a non-taxable event. That’s right, a freebie! You don’t have to pay any tax on it and you don’t have to report it on your income tax return either. This $14,000 gift is referred to as the Annual Exclusion and can be repeated each year for the rest of your life, without consequence. Although the Annual Exclusion and Lifetime Exemption amounts are different, they are intertwined as one has an impact on the other.

The “Lifetime Exemption” is the total amount (in terms of dollar value) that can be given away during your lifetime that is free from gift taxes. Think of this number as an allowance that you chip away at throughout your life, which will reduce the amount that can be given away upon your death free from U.S. Federal estate taxes. When you die, everything you own (money property, coin collections, classic cars, etc.) will be lumped together and valued. This total value is referred to as your “Estate”. Your estate is permitted to have a value of up to $5.45 million without incurring estate taxes (which can be very costly to your heirs). It just so happens that the amount of taxable gifts you are permitted throughout your life is equal to $5.45 million as well, so you need to take this into consideration when giving gifts during your lifetime.

As mentioned in the paragraph above, you are permitted to give $14,000 each year to as many people as you like, without consequence; however, if you were to give $20,000 to your nephew to help him start his own chain of lemonade stands, you would be giving a tax free gift of $14,000 and a taxable gift of $6,000 during the year in which the gift was made. Now, instead of paying gift tax on $6,000, you would reduce your Lifetime Exemption by $6,000, leaving you $5,444,000 to either gift (tax free) during your lifetime or pass down to your heirs without tax consequences.

As you can imagine, these scenarios may not apply to everyone, as an estate in excess of $5.45 million is applies to only 0.2% of estates in the US; however, this $5.45 million allowance only applies to Federal estate taxes. Some states have a lower threshold before you are assessed state estate taxes. For example, in the state of Minnesota, if your gross estate is in excess of $1.6 million upon your death, anything above that amount will be taxed at 9%, maxing out at 16%. Now this is a more realistic situation for a lot of retirees who have worked hard to build up a good nest egg and a paid off home; therefore, this is why gifting throughout your lifetime can be so beneficial. If you already know to whom you will leave your legacy, you can take advantage of accelerating that legacy by using the Annual Exclusion ($14,000 each year) to reduce your estate, and maximize what you pass on to future generations.

Also, keep in mind that there are gifting options if you are charitably inclined. Although there is no benefit (other than that warm, fuzzy feeling inside) of gifting to non-charities using the Annual Exclusion amount, a gift to a qualified charity may serve a dual purpose. If there is an organization you are passionate about, you may be able to deduct the amount of the gift when you file your taxes. Not only does this help the charity and those in need, but helps to reduce your income by the amount of the gift in years where you have a high income. Further, if you have appreciated securities in after-tax accounts, there are great opportunities for tax efficiency (avoid capital gains) in donating those securities to the charity of your choice.

If you feel as though gifting throughout your lifetime may be a strategy that’s right for you consult an estate planner along with your wealth manager for advice specific to your situation. They will be able to work together to figure out the most efficient way to leave a legacy to the ones you love.

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About the Author
Nick Sullivan, CFP®


Nick joined the All Star team in December of 2015. In his role as a Wealth Manager, try he will focus on advising clients on how to achieve their financial goals. He will work side-by-side with each member of the All Star team to educate All Star clients in all areas of the financial planning discipline. Nick holds various Series licenses (7, ask 63, ed 65) and recently passed his Certified Financial Planner Board examination in July of 2015. Prior to joining All Star, Nick worked as a financial advisor for Vanguard in Valley Forge, PA. He is a graduate of Penn State University where he studied both Finance and Economics. As a Philadelphia native, Nick is putting forth a consistent effort to familiarize himself with all things “Minnesota”, including a never ending search for the tastiest “Juicy Lucy” in the Twin Cities. Nick currently resides in Minneapolis and is a lover of all things outdoors, ice hockey, and photography. He is actively seeking out new ways to become more involved in the community and positively impact those around him