Gifts to Family and/or Friends

One way to gradually transfer your estate tax free is to use the annual exclusion and “gift” up to $15,000 per person, per year, to an unlimited number of recipients. If you and your spouse choose to “split” gifts, then $30,000 per year can be given away without you or the recipients paying transfer tax. (Gift-splitting is not necessary in community property states.)

You may also want to take advantage of the lifetime gift tax exemption. In 2021 the top tax rate is 40% and the exemption is $11.7 million.

If you would like to make a gift to a grandchild (or anyone else) and not be limited by the annual exclusion amount, make a direct payment to the providers for education (tuition only) and medical expenses. Gifts of this nature do not count toward the annual limit. You can also exclude gifts of tuition or medical payments made now for future services.

If you transfer realty to a relative for little or no consideration, make certain you report the gift. The IRS is searching property records to uncover unreported gifts.

If you have stock that is temporarily depressed in value but has high appreciation potential, consider giving it to your children now. The gift tax impact (determined by the fair market value on the date of the gift) will be reduced. When the stock price recovers, you will enjoy a second benefit: The increase in value will not increase your estate tax base.

Gifts may be made directly to the donee or deposited in a trust for the donee’s benefit. Many estates can be completely transferred to others in this way over time. There are special requirements when the trust beneficiary does not have a present interest in (does not enjoy current benefits from) the trust property. Gifts to such trusts do not qualify for the $15,000/$30,000 annual exclusions. In the case of trusts set up for minors, annual exclusion gifts are allowed, but beneficiaries must have full access to the trust assets at age 21.

One possible solution to the “present interest” problem is to create a “Crummey” trust for greater flexibility and control. This requires that you give each trust beneficiary a right of withdrawal when funds are transferred to the trust. Transfers subject to Crummey powers will qualify for the annual exclusions.

To enhance your gifting strategy, you may want to consider creating a family limited partnership (FLP), to which you can transfer property (such as rental property) and then gift interests to family members without relinquishing full control.