Because the world is still in flux with the lingering effects of the pandemic, estate planning may not be a the top of your list. However, current events make it the best time to pay attention to the so-called “gift tax” so you can take advantage while the maximum limits have been more than doubled.
There is a short-term window to gift money to your relatives and beneficiaries. Done correctly, this gifting could significantly lower the tax burden the recipients might face, as well as reduce taxes on your estate. Miss these deadlines and your tax burden could increase exponentially in the coming years.
Right now, in 2020, you can gift each individual beneficiary up to $15,000 without paying any taxes. This can be an entire cash donation, or a combination of cash and other assets. That exclusion is per recipient, not a total year’s amount. You can gift up to $15,000 per year to anyone you like, relative or not. The recipient normally doesn’t need to report the gift.
For a married couple, the total exclusion amount is $30,000. Married couples can transfer up to $23,160,000 of assets and property over their lifetimes without incurring a transfer tax when properly planned. However, gifts to each other are unlimited and excluded.
The current lifetime gift exemption is $11.58 million, an increase of $180,000 over 2019. Anything over the $15,000 limit (per gift) becomes part of this lifetime exemption. The tax rate ranges from 18% to 40%, paid by the giver in most cases. IRS form 709 has complete details.
What kinds of monetary donations can become gifts? Things like:
- College funds for children or grandchildren
- Paying for big expenses such as weddings
- Unrepaid loans to friends and relatives (i.e., car loan)
- Assisting with medical and hospital expenses
Anything that exceeds the $15,000 threshold in a year’s period is considered a “gift” and must be treated as such. Should you decide to help with education or medical/hospital expenses, paying the expenses to the school or facility directly can help avoid the requirement of a gift tax.
Over the next five years, the lifetime limit will be adjusted for inflation, raising the limit. As a part of the Tax Cuts and Jobs Act of 2017, the lifetime gifting limits increase every year through 2025 and then return to the pre-2018 level of $5.49 million per taxpayer.
Taking advantage of these temporary higher gifting limits gives you the opportunity to gift more to more individuals without paying a gift tax without affecting the limit.
The IRS previously issued a statement indicating that taking advantage of this increased exclusion amounts that end in 2025 “would not be adversely impacted” when the amounts are reduced back to the pre-2018 levels. In other words, once you give that money, it’s a done deal.
Why Do This Now?
You might be thinking about waiting until 2021 and after the election to take action to “see what happens.” That’s actually the worst thing you can do!
If your estate totals more than $11.58 million, the first thing to consider right now is how to gift more money in $15,000 amounts. You have a very limited opportunity to reduce your taxable estate and ensure that the money is in the hands of those you want to receive it, preferably without transferring a tax burden.
With the upcoming 2020 election, the possibility of abrupt changes in tax and tax laws after the election could threaten your current estate plan, as well as in the future. Although the changes are currently set to end (or “sunset”) in 2025, an unexpected change in administration and in the Congress could see that sunset date changed to as early as the following year. Additional charges could include limitations on the number of $15,000 gifts in a year, or to whom you can gift money.
It’s also possible that a retroactive tax change could be enacted, allowing a “claw-back” situation by the IRS, creating havoc for everyone involved in gifting and estate planning.
James C. Provenza, Chicago Estate Planning Attorney
Are you considering gifting money to your family members? Get started sooner rather than later. It’s never too early to begin your estate planning to ensure that your relatives receive what you want them to. Talk to an estate planning attorney who understands the law and is happy to work with you to ensure that your estate plan is exactly as you want it. James C. Provenza is an Illinois estate planning attorney with more than 25 years of estate planning experience. Call our firm today at (847) 729-3939, or use our online contact form.