The holiday season is upon us and, as is typical around this time of year, you may feel more inclined to make gifts to your loved ones. But as the old adage goes — no good deed goes unpunished. Unfortunately, making gifts of your assets without thoughtful planning can negatively impact you or your family.
Thoughtful and conscious gift giving has gained popularity because people are living much longer than they used to. Many people want to transfer some of their wealth to children and other family members when their families may need the money most. Further, the power of gifting is reflected in the time value of money — a dollar today is worth more than a dollar tomorrow.
But before you gift, consider the following:
Be aware of the gift tax: For 2017, each person has a lifetime estate and gift tax exemption of $5.49 million. The following gifts are exempt from gift tax: gifts to a spouse; gifts of $14,000 annually to any individual; and direct payments to an educational provider for tuition or to a provider for medical care. All gifts other than those designated above are considered taxable transfers and will require the filing of a gift tax return. Because of the lifetime exemption, such gifts may not trigger the 40 percent gift tax, but the gifts will reduce the amount of your remaining exemption.
One of the best gift-planning opportunities is the use of the $14,000 annual exclusion, adjusted annually for inflation. This exclusion allows a single person to give $14,000 a year to as many donees as they wish tax-free. Couples can combine their annual exclusions to give $28,000 a year to each donee, potentially reducing their estate by hundreds of thousands of dollars.
But beware! A common mistake often occurs when a married couple intends to use the $28,000 per year exclusion, but only one of them writes and signs a check from his or her personal account. Another is the failure to make gifts for tuition or medical care directly to the provider.
Choose the right asset: Gifts do not have to be in the form of cash. They can be non-cash property, such as real estate, shares of stock or personal items.
When you gift property, your cost basis carries over to the recipient. Conversely, most inherited property receives a stepped-up cost basis equal to the fair market value on the date of death. As a result, gifting property that has increased in value can result in a major capital gains tax if the donee later sells the property.
On the other hand, gifting an asset that has a low-cost basis and is likely to appreciate further may be ideal as future appreciation accrues to the recipient, not your estate. Regardless, when making non-cash gifts, it is imperative to get a proper appraisal of the gifted property.
Careful selection of the asset to gift is crucial. Consulting with an attorney before making a gift ensures you will make the appropriate decisions when faced with this question.
Be careful with gifts to minors: Gifts don’t have to be made directly to individuals and it’s not always advisable to do so. If a recipient is a child under the age of 18, questions arise as to who will manage the funds for the recipient.
You may have concerns about protecting the gifted assets from the recipient themselves or the claims of third parties. Setting up a trust designed to accept gifts might be your best bet.
Gifts to a trust may qualify for the annual exemption if the trust grants withdrawal rights to the beneficiaries. The right to withdraw can expire after a period. If the gift is not withdrawn in the period, it stays in the trust and is subject to its protection and control by the trustees you name. Even if a transfer to a trust qualifies for the annual exclusion, if a grandchild is the trust beneficiary, another transfer tax — the generation-skipping transfer tax — also must be addressed.
Conscientious giving ensures that what starts as a well-intentioned gift to family does not turn into a burden — to anyone.
Mi-Hae Kim is an attorney with Warner Norcross & Judd LLP who concentrates her practice in trusts and estates law. She can be reached at firstname.lastname@example.org.