By: Larissa A. Mehlfelder, CFP®, CAIA
There have been reports that legislative changes could be coming that would impact estate planning strategies for wealthy families and individuals. The potential for change has some people accelerating their gifting strategies to take advantage of the current regulation. Of course, we can’t rule out the possibility that new tax law will be enacted retroactively, so others are a bit more hesitant to take any action at this time.
As of right now, the annual gift and estate tax exemption remains $11.7 million per person, or $23.4 million for a married couple filing jointly. This means that if the total value of your estate is lower than this when you die, your heirs will pay no federal estate tax. If the value of your estate is higher than this when you die, your heirs will pay estate tax at a rate ranging from 18% to 40% on the amount that exceeds the exemption.
Using Your Annual Gift Exclusion
Despite the uncertainty, there’s one estate planning strategy that still remains relevant: gifting. Using the annual gift exclusion, you and your spouse can each give away up to $15,000 per year, or $30,000 together, to as many different individuals as you like gift-tax free. These annual gifts can add up to substantial sums over time.
Keep in mind that the annual gift exclusion is $15,000 per recipient, not per giver. This means you can give up to $15,000 per year in cash or other assets to as many different people as you like without having to pay a gift tax. For example, if you gave away $15,000 to 10 different people this year, this would remove $150,000 from your taxable estate. Do this for 10 years in a row and you’ve lowered the value of your taxable estate by $1.5 million, or $3 million combined with your spouse.
Types of Gifts
Gifts can take many different forms other than cash. This includes all different kinds of property — from artwork and antiques to stamp and baseball card collections. The only stipulation is that the property gifted cannot exceed $15,000 in value annually.
You can also give the gift of education by helping fund a family member’s 529 college savings account. A great benefit of 529 plans is that they allow five years of the annual $15,000 gift amount to be done upfront, meaning you can give $75,000 without incurring a gift tax. The earlier you fund a 529 plan, the more benefit you have from compounding tax-free returns. Or if the family member is already attending college, you can contribute toward paying his or her qualified education expenses like tuition, fees, and room and board. Even better, if you make your payments directly to the school they don’t count toward the $15,000 annual gift exclusion.
Similarly, you can also use gifts to help pay family members’ medical expenses. If the money is given directly to the healthcare provider, the gift won’t count toward the $15,000 annual gift exclusion.
There are non-financial reasons to consider using gifting as part of your estate planning strategy. By giving away assets while you’re still alive instead of after you die, you get the benefit of watching your loved ones enjoy their gifts. This can be especially gratifying if you contributed toward a child or grandchild’s college education and get to watch him or her walk across the stage to receive their degree.
Incorporate Charitable Giving, Too
You may also want to incorporate charitable giving into your gifting strategy. The good news here is that unlike gifts to family members, there’s no annual limit on how much money you can give away to charity tax-free. And you might be able to deduct gifts you make to qualified charities from your income when figuring your taxes, which could lower your annual tax liability.
Charitable trusts are often used by families to give away money to charities in the most tax-efficient way. There are two main types of charitable trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). Donor Advised Funds (DAFs) are another popular gifting tool because they allow you to grow your money in an investment account, where all the assets in the account will eventually be donated to an IRS-qualified public charity. One of the biggest benefits of establishing a DAF is that you can donate assets and claim a tax deduction now and decide later which specific charity will receive the gift.
When planning charitable giving strategies, consider donating appreciated assets like securities and real estate instead of cash to your favorite charities. This way, you won’t have to pay capital gains tax on the asset’s appreciation and the charity will receive the full current value of the asset. You’ll also be able to deduct more than what you originally paid for the asset.
How A Financial Advisor Can Help
About Larissa Mehlfelder
Ms. Mehlfelder joined Simon Quick in June 2009 with prior experience in wealth management and investing. As a Client Advisor based in Morristown, NJ, she works with clients in developing and implementing their financial planning objectives. Throughout her wealth management career at other boutique financial advisory firms, she has gained valuable experience monitoring client investments and spearheading strategic marketing efforts. Ms. Mehlfelder earned a BS degree in Finance with a minor in Mathematics from The College of New Jersey where she maintained Dean’s List status. She completed Fairleigh Dickinson University's Program for Financial Planners in 2011 and became a CERTIFIED FINANCIAL PLANNER™ practitioner in 2012. She earned her CAIA Charter in March of 2014 and is a member of the Chartered Alternative Investment Analyst Association. To learn more about Larissa visit her LinkedIn.
Simon Quick is an SEC registered investment advisor with offices in Morristown, New Jersey; Chattanooga, Tennessee; and Denver, Colorado. A copy of our written disclosure brochure discussing our advisory services and fees is available upon request. References to Simon Quick as being "registered" does not imply a certain level of education or expertise. No information provided shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such an offer or solicitation is prohibited by law or registration. Additionally, no information provided in this report is intended to constitute legal, tax, accounting, securities, or investment advice nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. It should not be assumed that future performance of any specific investment or investment strategy will be profitable, equal any corresponding indicated performance level(s), be suitable for your portfolio or individual situation, or prove successful.