By Matthew A. Ferri, Esq. As we continue the holiday season, and are in the spirit of gratitude, let’s consider gifts we give at year end. Some gifts can be given tax-free and knowing the applicable gift tax exemptions before you give to loved ones and charities can be beneficial.
Each year the IRS recognizes a gift tax exclusion. This is the amount an individual can gift to another person without incurring any tax. For 2020, the annual exclusion amount is $15,000. The gift tax is per person, per calendar year, which means an individual can make multiple tax-exempt gifts throughout the year to as many people as they would like. For a gift to qualify as an annual exclusion gift in 2020, it must be made by December 31, 2020
If you’re making a cash gift of $15,000 or less, then all you need do is make sure the gift is made by December 31, 2020. Ideally it would be given well before that date, so that the check can be cashed by the recipient. If the gift is not made by 12/31, then it will count as an annual exclusion gift for 2021.
As an example, a grandfather could give each of six his grandchildren $15,000 on their birthdays throughout the year. The entire $90,000 he gave throughout the year would be gift tax free. Additionally, spouses may also choose to “gift split” and double the amount. So, each of the six grandchildren could receive $30,000 before the grandparents have to pay gift taxes on it.
Any amount over the initial $15,000 or $30,000 is subject to the gift tax, unless you deduct it from your “lifetime exemption amount”. This is the amount you can give away tax-free throughout your lifetime. It includes both your gifts and all assets that will pass through your estate at death. Currently, the lifetime exemption is $11.58 million ($23.16 million for married couples). As we transition to a new administration however, this amount may drastically change. One of President-Elect Biden’s proposals is to lower the exemption amount to $3.5 million for individuals and $7 million for married couples. Many will still easily fit under this threshold, and be able to pass on their entire estate tax free. However, for others they may be looking at having to pay an estate tax they were previously exempt for.
An estate planning attorney is a great resource, especially if you are among the individuals over the lifetime exemption amount. Figuring out the correct estate planning strategy for yourself, what you’re trying to accomplish, and to protect your family can be tricky and a knowledgeable attorney can help reduce some frustration and present strategies you may not have thought of yourself.
When considering gifts and donations, it is also a great time to explore personal values as well as uncover the values held by children, grandchildren, and the entire family. Part of the work we do, is help guide families to define and develop these. We ask clients to think about what values they want to inspire and messages they want to leave for their kids, grandkids, and other relatives. These messages can add greater meaning to what we are leaving behind.
By modeling philanthropic behavior at home for children and grandchildren, parents can set an example. They can teach social responsibility toward those who need our help. This behavior encompasses not only writing checks to causes we care about, but also volunteerism – helping at a local animal shelter, cleaning up parks and other public areas, volunteering at a soup kitchen, or whatever your family values.
Your philanthropic behaviors can also help your family when you are gone. Should you have belongings no family member needs and they want to pass on to someone who could use it, knowing what causes you supported can help them determine the best place to donate it to. For instance, if you consistently helped at your local animal shelter, then maybe the extra blankets your family does not need get donated there instead of thrown away. This way they are honoring you and continuing a legacy you have built.
To discuss strategies, leaving a legacy for your family, or if you have any questions, please contact us, (248) 409-0256. We offer complimentary initial consultations and can help you with your planning today.