In the past, giving away assets during life was used to lower estate taxes at death. However, with the Federal Estate Tax exemption over $11 million per person and many states eliminating estate tax (including New Jersey) gifting is less important. In 2019, federal estate tax applied to 0.1% of people.
The federal estate tax is scheduled to “sunset” in 2026 and revert to $6 million per person indexed for inflation ($12 million per married couple). That would mean only 0.2% of people will owe federal estate tax but Congress could lower exemptions prior to 2026.
Three other reasons to gift are:
- State Estate Taxes Could Be an Issue for You: Twelve states and the District of Columbia still have a state estate tax with some as low as $1 million (e.g., Massachusetts). In Massachusetts, however, lifetime gifts reduce estate tax exposure (which are applied at graduated rates up to 20%). Before giving away assets, however, consider capital gains taxes which can exceed estate tax rates. When making a gift the giver (“donor”) gives the recipient (“donee”) not just the asset but their tax basis in the asset - commonly called “carryover basis” - meaning that a stock purchased for $10 and gifted when at $100 still has $90 of capital gain in it. When the donee sells that stock, they pay capital gains tax on the $90 gain (which can be up to 30%). If you die owning the same stock, it gets “stepped up basis” so that the inheritor gets the stock at $100 value and $100 basis with zero gain. Before making gifts for tax purposes be sure to carefully analyze all aspects of the transaction.
- Long-Term Care Planning: Gifting can be used to spend down assets to later qualify for nursing home Medicaid. If you are not self insured (wealthy) or have long term care insurance, this is a possible strategy. However, there are very low asset thresholds to qualify for Medicaid and a 5 year look back period. It is important to work with a Medicaid attorney for this type of gifting.
- The Joy of Giving: Many people want to help family members with a down payment of a home, education, rent or health insurance. These are often larger gifts so it is important to consider the recipients creditor risks and possible divorce. Education gifts are best made directly to the school because they are unlimited under the gift tax code that way. Gifts to purchase a house should be made via a legal agreement to protect you in case the recipient is later divorced and loses the house. If giving more than $15,000 per year to a person you may have to file a 709 gift tax return which is informational only and does not trigger gift tax.
Because gifting rules are complicated, it’s best to consult with a financial adviser, accountant or attorney before making major gifts.