To Gift or Not to Gift: A Year End Question

By Mary E. Vandenack

A long time estate planning strategy is to use the annual exclusion ($14,000 for 2015) as a method to transfer assets to heirs during life in an effort to reduce estate size and ultimate estate size. In 2015, donors have a lifetime exemption of $5.43 million. If married, each spouse has a $5.43 million exemption for a total combined exemption of $10.86 million.

For those individuals who still have estate over the lifetime exemption amount, annual exclusion gifting may still be a good idea; however, consideration should also be given to income tax consequences. When a donor transfers a gift to a beneficiary, the donee (recipient of gift) receives a transferred basis.

By way of example, consider that Donor James wants to make an annual exclusion gift to each of his three children equal to $14,000. He transfers cash to Orvis and Ollie but transfers a share of X stock to Orin. The X stock has a fair market value of $14,000 but a basis of only $1,000. As a result, the gift to Orin carries with it a tax burden of approximately $5,000, which means his net gift is really only $9,000.

At Donor James death, the share of X stock will get a step-up in basis to its fair market value of $14,000. Thus, if the stock is transferred to one of James’ children the day after death, there is no tax liability that transfers with the gift. Orin can sell the stock with no gain.

For those who are now under the estate tax exemption amounts, annual exclusion gifting during lifetime may actually result in your beneficiaries receiving less in the long-term than if the estate passes at death. For those with estate tax exposure, annual gifting remains good planning but consideration should be given to the most leveraged and tax effective approach to using annual exclusions.

© 2015 Houghton Vandenack Williams
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Are There Any Lifetime Planning Options Available to Me to Reduce My Exposure to Estate Taxes?

A Video FAQ with Mary E. Vandenack.

There are a variety of techniques that can be used to reduce your exposure to estate tax. A really simple one is an annual exclusion. Every year you can make a gift to any individual for up to a certain amount–that amount changes from year to year. You can also make lifetime gifts to your heirs/beneficiaries that are going to add up to the maximum amount you can pass during your lifetime. Next you want to go ahead and set up a trust or consider other lifetime planning strategies. There are a variety of trust techniques that will allow you to reduce your exposure to estate taxes. There are also some newer techniques that just using portability in your estate plan that can minimize your exposure to estate taxes.

© 2014 Parsonage Vandenack Williams LLC

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