Estate Planning Update:
Just a quick update that IRS recently announced new gift & estate tax exclusion amounts for 2015, plus a whole bunch of tips for how to approach gifting over the year end and beyond.
2015 Annual Exclusion Amount To Remain At $14,000
The annual exclusion is the amount you may give to any individual (and some trusts) without incurring gift tax. This amount renews every year, and can be doubled if spouses elect to “split” gifts. So, for example, you and your spouse could give a total of $56,000 – gift tax free – to your child and her spouse, because each of you can give $14,000 to each of them (you give $14,000 to child and $14,000 to child’s spouse, and your spouse gives the same amounts to them: $14K X 4 = $56K). Note that you do not need to write 4 checks. You and your spouse can each write $28,000 checks and then elect to split gifts on your 2014 gift tax return.
2015 Basic Exclusion Amount To Increase To $5,430,000
This is a $90,000 inicrease from the 2014 amount of $5,340,000. The Basic Exclusion (sometimes called the “Lifetime Exemption”) is the total amount one individual can give to others above and beyond the Annual Exclusion amount discussed above. Yes, if you are married, you and your spouse each have this exemption, for a 2015 total of $10,860,000.
The Lifetime Exemption is different from the Annual Exclusion in that it does not renew each year. It is a cumulative amount, and it is tied into the Estate Tax exemption amount. All of your gifts (again, not counting those covered by the $14K Annual Exclusion discussed above) are added up, and if the total ever exceeds $5.43M, the excess is subject to gift tax or estate tax.
Here’s an example:
Let’s say my wife and I give $28,000 to our daughter in December, 2014. Nice & easy, this falls under the Annual Exclusion amount and will simply be “not counted” as a gift for gift tax purposes.
Note that if we do not need to otherwise file a gift tax return for 2014, we should each write checks for $14,000, instead of my wife just writing one for $28,000. That’s because if you want to “split” your gifts, you need to make the election on a timely-filed gift tax return (due when your income tax return is due in April, or October if extended). So if you don’t want to file the return, write separate checks (but keep reading).
OK, now let’s say we are feeling generous and we give her an additional $888,000 in January, 2015. Why the weird number? Because on January 1 our Annual Exclusion resets, and we can give her the $28K again. So, our $888K gift is reduced to $860K right off the bat. And the $860K will be lopped off our remaining Basic Exclusion amounts.
In other words, assuming we have never made gifts over the Annual Exclusion amount before (sometimes called “taxable gifts”), our combined Basic Exclusion amount remaining will reduce to $10,000,000. Note that when you make total gifts over the Annual Exclusion amount in a tax year, you will be required to report all 2015 gifts on a gift tax return, where you can split the gifts. Writing separate checks makes no difference here because of the larger amounts.
What To Do With All Of This Info?
- Consider making your Annual Exclusion gifts to your children and grandchildren. If your overall estate will be taxable (i.e., it exceeds $5.43M single or $10.860 married), this is a great way to reduce your estate without any gift or estate tax. You can do this like clockwork, every year. We recommend an annual gift meeting with your advisors to compute the amounts and plan the check cutting.
- If you’d like to make larger gifts, consider using some of your Basic Exclusion amount. Again, if your estate will be taxable, making large gifts during lifetime will move assets – and all future return on those assets – out of your taxable estate.
I Get It, But…What About Trusts?
You may be thinking, “Ok, I get the idea about making gifts and I like it, but I’m not sure I like the idea of just handing over large sums of money to my children and grandchildren.” You are quite wise.
Most of the above concepts will apply to gifts made to trusts for your descendants. There are a number of catches though. For example, the Annual Exclusion usually only applies to gifts made to persons, not trusts. However, we can add certain withdrawal powers to the trust that will permit use of the Annual Exclusion. (You may have heard of so-called Crummey Trusts or Crummey Powers, named after the famous Crummey case).
This can be tremendously powerful. For example, let’s say you have 3 children and 7 grandchildren. That’s potentially 10 total trust beneficiaries. If you’re married, you can give $280,000 ($28K X 10) to the trust each year without a gift tax care in the world by jumping through a few legal hoops.
When Does All Of This Exclusion Stuff Not Apply?
Keep in mind that the Annual and Basic Exclusion amounts do not apply to these types of gifts:
- Gifts between spouses. In general, there is no gift or estate tax on transfers between spouses. But, because there’s always a catch, the following require special handling:
- gifts in trust for a spouse;
- gifts of “partial interests” in property to a spouse;
- gifts to a spouse who is not a US citizen;
- Gift payments of medical and education expenses. Paying someone’s – anyone’s, in any amount – medical or education expenses is generally not considered a gift for gift taxes. But, because there’s always a catch, BE CAREFUL:
- the payment must be made directly to the provider (i.e., the doctor or the school);
- “reimbursing” your child for expenses she paid herself is not permitted, and will be a taxable gift.
- Gifts to charity. No need to worry about exclusions here; gifts to charity may be made in any amount at any time without generating a tax. But, because there’s always a catch, be aware of the following:
- so-called “split-interest” charitable gifts or bequests must be properly structured; usually this means gifts in trusts like Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs) must be properly drafted and documented (also watch out for charitable gift annuities here);
- make sure your charity is a charity – use the IRS lookup service or a third party like Guidestar – if it doesn’t have an IRS exemption letter, it’s a taxable gift;
- gifts of anything other than cash or marketable securities (publicly traded stocks, bonds, etc.) require special handling; there are often appraisal requirements;
- get a thank you letter! – in order for the charitable gift to “count,” the charity must acknowledge your gift in writing;
- be careful with those event tickets and tables – (this is really an income tax deduction issue) the amount you claim as a deduction must be the total paid, less the fair market value of the meal or other experience you got when you purchased the tickets.
About Oakstone Law, PL
Oakstone Law PL was founded by Bob Kleinknecht. A member of the Family Trust Subcommittee, the Estate Tax & Trust Planning (ETTP) Committee and the Real Property, Probate & Trust Law (RPPTL) Section of the Florida Bar, Kleinknecht has 15 years’ experience.
Prior to founding Oakstone law, he spent more than eight years serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family in New York and Florida. Before that he was an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. after beginning his career with a boutique firm in Naples, Florida.
Licensed in Florida and Massachusetts, Kleinknecht has developed a practice model that eliminates billing by the hour and offers a streamlined, customized client process supported by technology, security and a personal approach.
For more information on Oakstone Law, click here. To get in touch with us, click here to send us an email, or call 239-206-3454. Our office is located at 5137 Castello Drive, Suite 2 in Naples, Florida 34103.