Should you consider gifting money to family or friends during your lifetime as part of your estate plan?

The IRS has increased the maximum amount we can gift to individual family members and friends tax-free from $15,000 to $16,000 per recipient per year.  This means you can now give an individual gift of up to $16,000 a year to as many individuals as you want without having to file a gift tax return. There is no limit on the amount you can gift to your spouse if your spouse is a U.S. citizen. Couples giving amounts in excess of $16,000 from a joint account should consult with their CPA to find out if they need to file a gift tax return.

While there is usually a cost associated with filing a gift tax return, there is rarely any tax payable on the funds you gift, by either you or the recipient.  The gift tax return simply serves as a record of the taxable gifts you have given during your lifetime, but the gift amounts on those returns use exemption from tax that would otherwise be available when you die and will be added to the total value of your estate when you die to determine if your estate owes any tax.

For those that die in 2022, their estates will be responsible for paying estate tax if the total assets of their estate (probate and non-probate assets), combined with the amount reported on any gift tax returns filed during their lifetime, exceed $12.06 million[1].  This is the per person tax exemption.  If you are married and your spouse dies first, it is possible to “port” your spouse’s unused exemption so that you can use it at your death, allowing you to leave your children as much as $24.12 million tax-free (depends on the exemption in place at the time of the surviving spouse’s death).

If you intend to gift smaller amounts of money to friends and/or relatives as part of your estate plan, you should consider whether it makes sense to give those gifts during your lifetime instead of at your death. If your financial resources allow for it, there are possibilities to do this without a tax consequence and giving monetary gifts during your lifetime can be a satisfying thing to do. Doing so not only allows for you to be around to receive the recipient’s gratitude, but it may also alleviate a pending financial crisis for the beneficiary.  If you want to give the gift of education or pay the recipient’s medical bills, so long as you pay the institution directly, you are not subject to the $16,000 cap on tax-exempt gifts. Gifting during your lifetime can also make your executor’s job easier, as they will not have to find those beneficiaries, keep track of those gifts or seek out signatures of those beneficiaries in order to close out the estate.

There may also be some tax advantages to gifting during your lifetime, especially to charity.  It is best to consult with your CPA, financial planner and estate planning lawyer to see how you can make the most of your gifting ability during your lifetime and at your death.  There may also be negative tax consequences of giving appreciated non-cash gifts, so consult with your tax advisor before making gifts of anything other than cash.

[1] This is the current amount for deaths in 2022.  The law is set to sunset to approx. $6 million (adjusted for inflation) in January of 2026.