Wills and Estates

'Tis the Season (to Gift your Annual Exclusion Amount)

By
Ally Hicks

Struggling to find a last-minute present for the person who has everything? Trying to impress the chilly in-laws? Consider gifting your annual exclusion amount. Codified in IRC 2503(b), the annual exclusion is the amount you can gift to any individual in a calendar year without the necessity of filing a federal gift tax return (Form 709), incurring gift tax, or reducing your available lifetime exemption amount.

Currently $10,000 adjusted for inflation ($17,000 in 2023 and $18,000 in 2024), the annual exclusion amount provides several tax-saving benefits. For one, the exclusion allows donors to pass property to family members, loved ones, or even strangers without transfer tax liability. Not only does this benefit the recipient of the gift, but it also has the added benefit of reducing the taxable estate of the donor.

Generally speaking, unless the donor retains an interest in the transferred property, outright gifts do not get included in the donor’s estate at death. As such, individuals with taxable estates above the lifetime exemption amount, currently $10M adjusted for inflation*, could reduce their taxable estates (and their estate tax liability) through annual gifting. Since the estate tax is currently levied at a rate of 40%, annual gifting can effectively save the donor 40 cents on the dollar in estate tax liability.

The Internal Revenue Code provides an additional method by which married couple scan maximize the benefits of their annual exclusions – IRC 2513 permits “gift-splitting” between spouses, which considers gifts made by one spouse as instead made one-half by each spouse.To illustrate, a married person can gift $34,000 (in 2023) to an individual, and under IRC 2513, such transfer will be considered a $17,000 gift from each spouse, regardless of whether the gift was made from the donor spouse’s separate assets. As such, gift-splitting provides a greater degree of administrative flexibility by eliminating the necessity of retitling assets between spouses prior to gifting. To qualify for gift-splitting, both spouses must 1.) consent to such gift, 2.) be United States citizens, and 3.) elect gift-splitting on a timely-filed gift tax return.

For those individuals interested in coordinating annual gifting with their estate plans, the Internal Revenue Code and applicable precedent provide that gifts to irrevocable trusts qualify for the annual exclusion if the beneficiary has a present interest in the gift. Typically, this present interest requirement is satisfied by including Crummey powers in the trust. Named for the hallmark 7th Circuit case, Crummey powers give a beneficiary the right to withdrawal the amount contributed for a limited period of time, thereby satisfying the present interest requirement. Such trusts must be carefully drafted to avoid any unintended estate inclusion for the grantor.

As we wind down 2023 and prepare for the year ahead, it’s never too late (or too early) to start considering financially savvy tax-saving techniques. To learn more about how lifetime gifting can benefit your overall estate plan, contact the experienced Trusts & Estates attorneys at Thompson Burton PLLC.

*In 2023, the lifetime exemption is $12.92M per person, and increases based on an inflationary adjustment to $13.61M per person in 2024. The exemption amount is scheduled to sunset on January 1, 2026 to $5M per person adjusted for inflation.

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