Since the passage of the COVID-19 relief bill, attention has shifted to plans for investments in infrastructure and the potential tax reform to assist in paying for such investment. While there has yet to be a definitive timeframe announced for this tax reform, it is important to be mindful of potential tax reform as it pertains to an individual’s estate plan.
Currently, under the 2017 Tax Cuts and Jobs Act (TCJA), each individual has an estate tax and lifetime gift exemption of $11.7 million in 2021 ($23.4 million for married couples). This current exemption amount is scheduled to sunset in 2025 and decrease to $5.5 million; however, there is chatter that this exemption could decrease to as low as $3.5 million per person.
Regardless of whether the estate tax and lifetime gift exemption decreases in 2025 or earlier, the notion of “use it or lose it” still applies. Accordingly, being mindful in making lifetime gifts is a great strategy for taking advantage of such a high exemption amount while also reducing your taxable estate.
Gifting the Annual Gift Tax Exclusion Amount
The low hanging fruit of gifting strategies is that it allows one to capitalize on the annual exclusion. Currently, each donor can gift up to $15,000 per donee (up to $30,000 for married couples) without having to pay any gift tax.
Making Large Gifts into Trusts
When making larger gifts, gifting into trusts rather than gifting outright may be a better strategy. Gifting into trusts allows the grantor/donor to specify when and how the assets are transferred to his or her beneficiaries. This especially comes into play if the beneficiaries are young or if the gift is designed to benefit multiple generations. As a bonus, gifting into trusts can help to ensure that the property in one’s estate is managed efficiently, while also protecting the assets from creditors of the beneficiaries, such as ex-spouses.
Gifting for Education
Another gifting strategy that helps individuals reduce their taxable estate is to utilize the tuition gift tax exclusion. Under this exclusion, individuals can reduce their taxable estate by helping a child pay for college. Tuition payments made directly to an educational organization are exempt from gift taxes, as well as the generation-skipping transfer tax. These gifts do not require the filing of a gift tax return, even if the amount exceeds the $15,000 annual exclusion. It is important to note that tuition payments made directly to a college may potentially reduce a student’s financial aid eligibility, so another alternative for education gifting is to contribute to a child’s 529 college savings plan. This may have less of an impact on financial aid. The 529 college savings plan contributions are considered gifts for tax purposes, and up to $15,000 qualifies for the annual gift tax exclusion.
Gifting to a charitable organization is another great strategy to reduce your taxable estate. Not only do these contributions benefit the charity, the donor-taxpayer receives tax savings by deducting part or all of the contributions on his or tax return. These charitable contributions must meet certain requirements in order to qualify for the deduction.