In November, 2020, Lasher Estate Planning attorney, Gurneet Takhar, published the original post “‘Tis the Season: A Gifting Opportunity.” This is an update.
If you are in the holiday spirit this season, you may wish to make gifts using the 2021 annual federal gift tax exclusion amount. To qualify for this exclusion for the year 2021, the gifts must be made no later than December 31, 2021 if being made directly to an individual or December 1, 2021 if being made to a trust.
You may give up to $15,000 per recipient, to as many recipients as you wish without filing a federal gift tax return and without reducing your lifetime federal exemption, which is currently $11,700,000 per person. If you are married, you and your spouse may each give $15,000, totaling $30,000 per recipient. Any gift in excess of the $15,000 will reduce your lifetime federal exemption. So long as the gift is cash and $15,000 (per donor) or less, no federal gift tax return will be due and neither you nor your spouse’s $11,700,000 lifetime federal exemption will be impacted. Note that gifts are not taxable to the recipient regardless of the amount of the gift.
If the gift is anything other than cash, there could be other complications. For example, if you give publicly traded stock valued at $15,000, the recipient also takes your basis in that stock, which, depending on that basis, may cause a taxable event upon the sale of that stock. Also, if you gift an interest in a privately held company, real estate, or other hard to value asset, the IRS will want to see a properly documented valuation report prepared by a certified professional (this is different than an appraisal). Finally, a gift other than cash will trigger a requirement to file a gift tax return so that the IRS has the opportunity to either agree or disagree with the value you placed on the gift.
Finally, with regard to the annual exclusion, a $15,000 gift made to a trust must be accompanied by a special notice to the trust beneficiary known as a Crummey Notice (named after a famous tax court case) in order for it to qualify as a gift under the annual exclusion. This notice generally requires the beneficiary to have 30 days’ time to decide whether he/she would like to take that $15,000 or allow it to go to the trust. Most beneficiaries will not take the $15,000 because that would discourage donors from making future gifts to such recipient. The donor’s intent here is to preserve the gift in trust for the recipient’s future use. While many practitioners simply allow a beneficiary to waive that 30 day requirement, due to a technical legal issue surrounding the difference between waiving notice or allowing notice to lapse, it is far better to allow the notice to lapse (i.e. let the 30 days expire and do not waive). This is why annual exclusion gifts to trusts should be made no later than December 1, 2021. Note that if there are grandchildren beneficiaries in your trust there is some additional complexity.
Other simple tools to reduce your taxable estate include making gifts to IRS-approved charities (either while still alive or through your will), paying someone’s tuition, or paying someone’s medical expenses. To make these latter gifts, you must make such payments directly to the educational institutions and medical providers, respectively to prevent such transfers from being subject to gift tax. These charitable, tuition, and medical gifts have no limit and do not reduce your lifetime federal exemption.
This post covers only the basics of gifting options. Please note there are additional complexities based on the US citizenship and residence status of the donor and donee.