CEO MUSINGS: Lifetime Gifting
You hear about it all the time. You should consider making gifts during your lifetime, rather than waiting until you die.
Why should you do it? How should you do it?
Let’s pass over the most obvious reasons of gifting, the altruistic motives of giving to family or charity, and focus on the tax reasons. For income taxes, most gifts to charity are tax deductible. This also true for estate tax purposes. Therefore, a gift during life yields to the donor the benefit of an income tax deduction, as well as a reduction of the donor’s taxable estate; a double whammy! For instance, if the donor is in a 40% income tax bracket, and a 40% estate tax bracket, a gift of $100 to charity during life would yield $40 of income tax savings and at least $24 of estate tax savings. Assuming that the donor’s assets are invested in equities, real estate or other appreciating assets, and a reasonable growth rate is 5% to 10%, the estate tax savings grows significantly.
When gifting to charity, it is often desirable to gift appreciated publicly traded stock, since the charitable tax deduction is based on the fair market value of the stock and the built-in capital gain is avoided.
For taxpayers aged 70 ½ or older, charitable contributions up to $100,000 each year can be made directly from their IRAs, allowing the taxpayer to avoid paying income taxes on the distribution. These IRA Qualified Charitable Distributions (QCDs) are made directly to qualified charities from the traditional IRA, inherited IRA, or inactive SEPs or SIMPLE IRAs. For married couples, each spouse can make QCDs for a potential $200,000 to charity each year avoiding income tax.
In a pure gift and estate tax world, where the gift tax and the estate tax are both 40%, lifetime gifts are considerably more economical than testamentary gifts from a decedent’s estate. If one were to gift $100 to a loved one and incur a $40 gift tax, the total of the amount transferred would be $140. However, from a taxable estate, if a donor wanted the same $100 to go to her loved one, the estate would have to start with $166.67, because the 40% estate tax would yield $66.67, leaving $100 to go to the donor’s loved one. Another way of saying this is that the estate tax is almost 42% more expensive than the gift tax, even though they are the same taxable rate. Also, as in the philanthropy example above, a gift removes all future appreciation from the donor’s estate, which further increases the ultimate tax savings.
For 2023, the estate, gift and generation skipping tax (GST) tax exemptions are $12,920,000 per person, that’s almost $26M per married couple. These large exemptions are scheduled to sunset after 2025, essentially being halved. Therefore, there is some sense of urgency for families to consider gifting to use these high exemptions before they go down; use it or lose it! And the sooner the lifetime gifting occurs, more future appreciation is removed from the donor’s taxable estate. Some will continue to procrastinate because they seriously doubt the sunset will occur. But what if they are wrong? And what of the future appreciation that will continue to accumulate inside their taxable estates?
The annual gift tax exclusion is now $16,000. The first $16,000 given to (or for the benefit of) a particular donee is excluded from gift tax. Gift splitting among married individuals allows a combined exclusion of $32,000 per donee. Trusts for the benefit of descendants can use exclusions for children, grandchildren, and so on. The exclusion renews annually, so it is a “use it or lose it” method of removing assets from your estate.
There is no limit to amounts gifted for education or medical purposes. The exclusion applies to direct payments for (i) the diagnosis, cure, mitigation, treatment or prevention of disease, (ii) affecting the structure or function of the body, or (iii) transportation for medical care. Additionally, payments made directly to an accredited educational institution are exempt from gift taxes.
