It’s the time of year when everyone is thinking about giving. Whether it be gifts to loved ones or charity, gifting is as important a part of this holiday season as is receiving gifts. In light of this, we thought we’d discuss gifting in the estate planning context.
One area in which gifting can be useful is in managing estate tax liability. Here in Massachusetts, there is an estate tax on estates over one million dollars in value. These days, with the stock market performing as it has and real estate prices going up, we are seeing more and more taxable estates. Gifting assets during life can minimize, or eliminate entirely, an estate tax liability.
For example, let’s say that Jack and Joan have an estate of $1.4m, consisting of a house worth $400k, life insurance that will pay out $150k, IRAs with $400k in them, and bank/investment accounts with $450k in them. If Jack and Joan pass away with all these assets, his estate will pay an estate tax in the area of $60K. Knowing this, Jack and Joan decide to gift some assets to their children. Jack and Joan have three children, all of whom are married. Jack and Joan can each give $14k (for 2017) to each of their children and each of their spouses per year without having to file a gift tax return. This amounts to $84k a year, meaning that Jack and Joan will have reduced their estate to below $1m in five years. They will have eliminated their estate tax liability while at the same time distributing assets to their children while alive. Of course, before doing this Jack and Joan would establish a detailed analysis of their financial future to make sure that remaining assets would be sufficient. Also, depending on their mindset, they may decide not to engage in gifting in this situation at all, considering the fact that the kids will get assets sufficient to cover the estate tax liability when they pass away anyway.
In another scenario, Fred, a widower, has done very well investing over his lifetime. Over the forty years that he’s been buying stock, he’s amassed an investment account with $3m in it. This account is comprised of stock that has appreciated greatly in value. If Fred were to sell this stock outright, he would pay a lot of money in capital gains tax. Obviously, Fred’s estate will be exposed to a hefty estate tax, but if his heirs inherit the stock when he dies, they will pay much less in capital gains than he would have if they sell it. Fred meets with an attorney and after a while Fred reveals that he would like to make charitable donations in his estate plan. The attorney suggests that he could establish a charitable remainder trust, fund the trust with some of the stock, have the stock sold and name the charity as an ultimate beneficiary. There would be no capital gains tax on the sale of the stock because of the involvement of the charity, Fred will be lowering his estate for estate tax purposes, and, depending upon how the CRT is set up, he could receive annual distributions to himself that could be passed to his beneficiaries if he should die. Best of all, Fred will have accomplished his goal of giving to charity.
Of course, there are many caveats to the issues discussed here. In Jack and Joan’s situation, gifting money to their children may not be a good thing. Outright gifts can be subject to claims by creditors or be split in a divorce. Also, there’s the issue of the children coming to rely on these gifts over time. What happens in year six when there are no more gifts but Jack and Joan’s daughter has already planned her elaborate European vacation?
As always, this article is not intended to offer legal advice, it is merely an overview of some issues connected with gifting. Any steps taken in estate planning should be carried out with the advice of an experienced attorney.
Attorney Michael Coleman earned his Juris Doctor degree from Hofstra School of Law. He is also a member of the American Academy of Estate Planning Attorneys and the National Academy of Elder Law Attorneys, Inc. Attorney Coleman focuses his practice on various estate planning, estate administration, probate, retirement planning, and real estate matters. Lantz Law, Inc. has served the communities of Southcoast, South Shore, Cape Cod, and the Islands since 1969.