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Estate Tax And Lifetime Gifting

On Behalf of | Jan 16, 2021 | Estate Planning & Probate

A valuable tool available in composing a well-thought-out estate plan is the use of lifetime transfers or gifts. Gifts that can be made during your lifetime are called “inter vivos” transfers. Inter vivos gifts have many advantages.  Some of the advantages include removing assets from your estate that could be subject to federal estate tax and living to see the recipient utilize the benefits of the assets during your lifetime.

What is a Gift?

A gift is the transfer of property by one individual to another while receiving nothing, or less than full value, in return. According to the Internal Revenue Service: “You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.” [1]

Estate Taxes

Estate taxes are levied by the federal government on gifts exceeding certain values. The federal exemption for 2020 is $11.58 million per individual, up from $11.4 million in 2019. These amounts are doubled for married couples. The exemption is indexed for inflation and the IRS announced that the individual exemption for 2021 is increasing to $11.7 million for an individual and 23.4 for a couple. For both 2020 and 2021, the annual gift tax exclusion amount is $15,000 per person. That means, in 2020 and 2021, you can give up to $15,000 each to multiple individuals without triggering the need to file a gift tax return. If you give a gift greater than the annual gift tax exclusion amount, then you as the donor must file a gift tax return. The requirement that you file a gift tax return does not mean that you will owe a tax but you are required to report it to the Internal Revenue Service. Each year, the value of the gift to another person that is greater than the annual gift tax exclusion amount is accumulated and counts against both your lifetime gift tax exemption and your federal estate tax exemption, until it reaches the lifetime estate and gift tax exemption amount. You do not pay gift tax until you have gifted away an amount that is more than your (or if married, your and your spouse’s joint) lifetime estate and gift tax exemption. When you die, if you have given away more than your lifetime estate and gift tax exemption amount, then you will be subject to estate tax for the value of the gifts that are greater than the lifetime exemption. The federal lifetime gift tax exemption is portable between spouses. After the death of the first spouse to die, if the deceased spouse’s estate did not exhaust their tax exception amount ($11.7 million for 2021) the surviving spouse can elect to utilize the rest.  This means a married couple can take advantage of the full $23.4 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the personal representative of the deceased spouse’s estate. Direct payments of tuition or medical expenses of another person (i.e., directly to the educational institution or the medical provider) are to not be classified as a gift regardless of the amount so long as those payments are made directly to the medical care provider or educational institution.

Currently the federal estate tax is set at 40% for those gifts outside of the lifetime exemption.

Direct payments of tuition or medical expenses of another person (i.e., directly to the educational institution or the medical provider) are to not be classified as a gift regardless of the amount so long as those payments are made directly to the medical care provider or educational institution.Please note, that the current estate tax exemption is set to expire on December 31, 2025. It is anticipated that the exemption amount will drop down to about half of its current exclusion rate. Congress has advised that individuals who take advantage of the current exemption while it is in place will still be able to maintain that advantage when the current tax exemption expires. It is also important to consider whether your state has its own gift or estate tax laws.  North Dakota does not have an estate tax and Minnesota does. The state estate tax laws and exemptions may not necessarily be the same as the current federal exemptions. It is important to consult with professionals who can advise you on both the state and federal tax rules that could impact your estate plan.

Other Benefits

In addition to tax benefits, you will be removing assets from your estate that will need to be transferred at death.  By reducing the size of your estate, you will be reducing the costs of probating your estate.

Another maybe less tangible benefit is you will be present to witness the gift being enjoyed by the recipient.

Conclusion

Lifetime gifts can be a very important and useful tool in composing a thorough estate plan. It is important you consult with your attorney, tax advisors and investment advisors to prepare a plan that will meet your goals.

[1] Gift Tax. (n.d.). Retrieved January 08, 2021, from https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax

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