In many ways, gift planning is a natural extension of the estate planning process where a client’s stated goals are refined and expanded so that the client can guide how we preserve their legacy.
Whether a client intends to provide for family and loved ones, impact their community at large, or some combination thereof, gift planning is a process that asks clients to go a step beyond the basic estate planning documents and consider transitioning their wealth now while they can guide the process.
In this way, gift planning encompasses several strategies and documents which will help define or refine a client’s intentions while preserving their legacy – whatever it may be. While gifting can be accomplished as part of your estate through a Last Will and Testament (“Will”) or Revocable Living Trust (“RLT”), undertaking gift planning during your lifetime creates an opportunity for clients to guide and shape the process, to provide a transition period for beneficiaries, and to witness and enjoy the effects of their gifts on others while they are still living.
By incorporating gift planning into your larger estate plan, we strive to meet your goals and help you define your legacy while being conscious of any proposed strategy’s financial and administrative implications. We strive to tailor the gifting process so that you are comfortable with the plan, now and in the future.
When gifting to family members, there are several avenues worth considering for transferring wealth to your loved ones, each with its own strengths and weaknesses. Gifts can be made outright to an individual or an organization on their behalf, to college savings plans for their eventual use, or in trust for their benefit. Clients should consider the financial and tax consequences of any gifts, both for themselves and the beneficiaries. These decisions are often interrelated gifts that should generally be considered as part of the greater estate plan.
Family gifting should, ideally, tailor the gifting strategy to best fit your specific needs and circumstances. When structuring any family gifting – whether an outright gift, an assignment of business interest, or establishing and funding a family trust – the nature of the asset and the manner should be discussed so that any gift made will not only protect and preserve the asset or wealth transferred but also align with a client’s overall goals and wishes.
If you are planning for a beneficiary with special needs, especially if they currently receive public benefits or may in the future, additional gift planning is particularly important. Family gifting to or for the benefit of a disabled beneficiary may require greater flexibility so that the beneficiary is protected now and in the future as their needs change. Whether you are planning for an elderly parent or a disabled child, there are many income and gift tax considerations. The strategy will likely use a combination of different gifting techniques and core estate planning tools that are tailored to the specific situation.
Much like family gifting discussed above, charitable gifting can be structured in several ways. Many of us are already familiar with lifetime charitable giving, whether as a tithe to our congregation, donations to community organizations, or (for those who are subject to the Required Minimum Distribution rules) as a Qualified Charitable Distribution (“QCD”) directly from an IRA or other retirement account. However, when considering charitable giving as part of a larger estate plan, these outright gifts sometimes feel limiting, especially when you want to provide for several organizations or future generations to consider charitable giving.
Donor-Advised Funds (“DAFs”) and Private Foundations are two options that will allow you to recognize immediate tax benefits while allowing for flexibility in the future. Most DAFs allow you to name at least one generation of successor owners who will continue gifting following your death, and a Private Foundation may allow your family to continue gifting assets in your memory for multiple generations. However, not all assets lend themselves to funding a DAF which is not generally an issue for a Private Foundation. On the other hand, Private Foundations are costly to establish and require ongoing administration which is generally avoided when using a DAF.
Some clients may consider establishing a Split-Interest Trust, such as a Charitable Lead Trust or Charitable Remainder Trust, which allows assets to be set aside to benefit individuals and charitable organizations. These trust arrangements are referred to as “split-interests” because the trust creates two separate economic interests, the individual and the charity, which each benefit from the trust during separate periods of time. A Charitable Lead Trust benefits the charitable organization now and in the immediate future by creating a stream of payments to the charity for the term of the trust, when the trust terminates, the assets are distributed to the individual. Conversely, a Charitable Remainder Trust creates a similar stream of payments for the individual and the charitable organization receives the trust’s assets only after that stream of payments terminates. These split-interest trusts are often used to minimize estate and/or gift taxes by balancing the calculated value of the charitable interest against the current value of the gift. These trusts generally require greater oversight and administrative care in preserving charitable gifts which should be considered before establishing such trust.
Any gift planning should account for the federal gift tax laws and the relation to estate tax laws, whether we prepare your annual gift tax returns or coordinate with your CPA or tax preparer to provide information. Because the federal gift tax laws are much broader than the name implies, it is important to consider the opportunities that lifetime gifting provides, especially in states like Maryland where the state imposes an estate tax, but no corresponding gift tax exists.
The federal gift tax is designed around two crucial numbers:
- The annual exclusion that is the total value gifted to a recipient by an individual for any given calendar year without being considered a taxable gift. Married couples can effectively double this amount by either each giving gifts which total no more than the annual exclusion amount or by electing to split gifts made on their annual gift tax returns. The annual exclusion is adjusted periodically.
- The lifetime unified tax credit ultimately reflects the total amount which an individual can transfer without paying estate or gift tax. The unified credit is designed to consider all taxable gifts which an individual makes during their lifetime (the gifts made for any year in excess of the applicable annual exclusion amount) plus the amount owned and/or controlled by a decedent as reported on the federal estate tax return. Under current law, the federal credit is derived from a base number which is adjusted annually based on inflation; currently, the credit is also doubled due to the Tax Cut and Jobs Act, but this additional credit amount is set to “sunset” or expire December 31, 2025.
A separate tax, the federal Generation-Skipping Transfer Tax (or “GST Tax”), is commonly linked with the federal gift tax, and the use of any GST Tax lifetime credit is also reflected on the annual gift tax return. This GST Tax is a complicated set of laws that often requires special attention. Allocation of the GST Tax credit is especially important when assets have been gifted into a trust to protect those assets from exposure GST Tax when distributions are made from the trust.
Gift tax returns are due at the same time as your individual income tax return, generally April 15th unless you have filed for an extension. If you and/or your spouse make significant gifts during the year (whether outright or in trust), you will likely be required to file a federal gift tax return which states what amount of the gifts, if any, is considered part of the annual exclusion, what part counts against the lifetime unified credit, and how much GST Tax credit may have been used during the year.