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To gift or not to gift?

By Cynthia Turoski, on July 24th, 2018

That is the question, and a good one at that. But first, a primer on the estate tax law as it stands now.

Federal estate tax
With the 2017 Tax Cuts and Jobs Act (TCJA) came changes in the federal estate tax law. The federal estate/gift exemption doubled from $5 million to $10 million, indexed. The exemption was $5,490,000 per person with indexing, and is now $11,180,000 per person. Needless to say, most people won’t be subject to a federal estate tax.

The exemption can be used for gifts during lifetime and any unused exemption can be used at your death. If there is still a balance left over, your spouse can use it in addition to their own. This is called portability, which was retained by TCJA. Your executor would need to elect portability on your estate tax return in order to lock that in for your spouse to use. A simplified estate tax return can be filed if it is being filed only for that purpose. Keep in mind that there is no portability for the Generation Skipping Tax (GST) exemption for gifts to grandchildren. Any exemption remaining at first death goes unused, so careful planning is important.

The increased exemption is due to sunset on December 31, 2025, but it can change earlier with a change in administration. Considering that we’ll have two presidential elections during that time, there is much uncertainty. However, any portability elections under the current exemption level would be locked in—no matter what law changes might come about.

The gifting freebies remain, such as:

  • Unlimited payments of tuition or medical expenses if paid directly to the institution.
  • Annual exclusion gifts of up to $15,000 (for 2018) per person per done, or $30,000 per couple per donee if you elect gift splitting on a gift tax return.
  • The annual exclusion can also be applied to larger upfront gifts to a 529 plan. You can make a lump-sum contribution to a 529 plan of up to five times the annual gift tax exclusion ($75,000 in 2018), elect on a gift tax return to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.
  • Roth IRA conversions for IRAs your heirs inherit—Income tax is due on traditional IRAs that are converted to Roth IRAs. Heirs that inherit the Roth IRA receive the distributions tax-free during their lifetime. You essentially pay the income tax for them without it being treated as a taxable gift. This can be a great strategy for IRAs you don’t expect to need for your lifetime when you also have excess cash with which to pay the income tax and Medicaid for elder care isn’t an issue.

The estate/gift tax rate remains at 40 percent. Basis step-up was retained. There is still basis carryover on assets gifted during lifetime so gift recipients keep whatever your cost basis was. These are even more important considerations than ever before when deciding to gift.

Though you might not be subject to a federal estate tax (at least for now), what about state estate tax? Each state’s laws vary so you’ll need to consult a tax professional about the tax laws in your state if other than New York.

New York estate tax
New York’s 2018 estate exclusion is $5.25 million. For 2019, it will be tied to what the federal exclusion would’ve been indexed to under the old law. But beware of “the cliff.” The exclusion phases out for taxable estates of 100 to 105 percent of the New York exemption in effect at death and is fully phased out for estates exceeding 105 percent of the exclusion. That means $0 New York exemption for those estates, and every dollar could be taxable. The top tax rate is 16 percent. Adding to that, New York doesn’t have portability of the exemption to the surviving spouse. It’s use it or lose it.

Though New York doesn’t have a gift tax, gifts made within three years of death by decedents dying before January 1, 2019, are pulled back into the estate.

So back to the gifting question. When deciding to gift, you have to weigh up whether there might be a federal and/or state estate tax and what the income tax consequences might be to your heirs when they sell the inherited assets. If your estate wouldn’t be subject to federal or New York estate tax, retaining assets to get the step-up in basis would minimize income taxes to your heirs when they later sell it. Gifting might be best if your estate exceeds the current federal exemption so you can take advantage of this higher exemption in case it goes away. For estates in between and subject only to New York estate tax, it depends. It’s really a facts and circumstances situation.

The change in the estate tax law eliminates most taxable estates, but could be temporary. In the meantime, existing overall estate plans would benefit from a review to make sure there are no unintended consequences and to see if there are any steps to take.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Jess LeDonne
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