The 2018 gift and estate tax exemption of $11.18 million is considerably larger than it has ever been. In addition to the tax benefits, making a gift during your lifetime allows your children or other beneficiaries to benefit from the gift. Below are the factors to consider when making a gift in 2018.
How long will the $11.18 million tax exemption last?
The 2017 Tax Cuts and Jobs Act of 2017 doubled the gift and estate tax exemption in 2018, however the future of the estate tax is unknown. Unless Congress acts sooner, the 2017 Act expires at the end of 2025 and will revert to $5.49 million, adjusted for inflation. With the future of the estate and gift tax unknown, 2018 may be the perfect time of make a gift. If you have a large enough estate that you expect to pay estate tax when you pass away, it may be beneficial to do so now while the exemption is as high as it is.
What are the best and worst assets to gift?
The best assets to give are those most likely to appreciate as they can be gifted now at their fair market value instead of having the appreciated assets subject to estate tax. Therefore, the more the asset appreciates, the larger the tax benefit. If you are gifting to charities, give appreciated securities rather than cash. By donating securities with a higher fair market value than your original purchase price, you can deduct the fair market value as a charitable contribution. For example, if you have appreciated stock worth $5,000 that you purchased for $3,000, instead of selling the stock and paying tax on your $2,000 capital gain, you can give the stock directly to charity, pay no taxes, and still deduct $5,000.
Alternatively, if you are generously gifting to a relative, you may want to give cash instead of gifting appreciated assets. If you give appreciated stock to a relative, the cost basis will transfer to the donee, and they will have to pay taxes on the gain when they sell the stock.
If you are age 70 ½ or older you can exclude from income up to $100,000 in distributions from a traditional or inherited IRA if given directly to a charity. This distribution meets the required minimum distribution requirements and is really useful if you are going to be taking the new increased standard deduction anyways.
Lastly, if looking for a deduction now, but not sure which charity to donate to? Consider gifting to a donor-advised fund where the funds can be set aside for future gifting to charities.
What if I want to give to a child that is a minor?
If you want to provide a gift to a minor child, consider setting up a trust, such as an irrevocable trust, as trusts allow for more donor control of the assets, even after the donor’s death. By setting up a trust, donors can direct how they want the money to be managed and the circumstances under which the money can be distributed. Donors can also specify whether their children will be able to control the money at a certain age. An irrevocable trust can also be an effective tool for transferring assets to adult child while potentially reducing estate taxes and directing how you would like the assets to be handled after you have passed away.
The most common trust for a minor is known as a custodial account (UTMA account). The Uniform Gift to Minors Act established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee.
Should I gift part of my business?
If you gift away part of a business, the gift will qualify for discounts for lack of control and lack of marketability and can take up less of the exemption than the business is really worth. The ownership of a non-controlling interest in a company does not have the ability to make any decisions in the business, therefore it is generally less valuable than a controlling ownership interest. In addition, there are certain marketability differences between an ownership interest in a privately held company and an ownership interest in the stock of a publicly-traded company. These discounts combined could generally reduce the value of the business interest by as much as 35 percent. Therefore, a partnership interest with a pre-discounted value of $10 million would only use $6.5 million of your exemption.
A big advantage of gifting away a business interest is that any future appreciation in the business will be excluded from your estate, and therefore won’t be subject to gift tax. Conversely, when a business interest is gifted, the tax basis in the business will transfer to the donee, whereas if the business interest were inherited then it would receive a stepped-up basis at the time of death. When considering gifting a business interest, it is important to consider all of these factors and to have a business valuation done as well.
Along with the lifetime gifting exclusion, it is also important to note than each person is allowed to gift $15,000 each year to any individual without counting against your lifetime exemption. Therefore, a married couple can give $30,000 to each of their children and grandchildren, or anyone else, and not have to use any of their lifetime exemption. If you do exceed the annual exclusion, you will need to file a gift tax return.
If you need assistance or have questions about gifting or business valuations, Selden Fox can help. Our team has considerable experience in this area and can identify the appropriate solution for your needs. For additional information please call us at 630-954-1400 or click here to contact us.
John T. Wojcik, CPA, MST, CVA