This Blog was initially posted on February 22, 2017. It has been updated as of July 13, 2020, to reflect changes in the federal estate and gift tax exemption and the annual exclusion.
Your Will is not the only mechanism for transferring your assets to family members. Often, it makes sense to give family members financial gifts or gifts of property while you are still living. Those gifts may help an adult child purchase a home, enable grandchildren to attend a school, or assist a family member with mounting medical bills. Gifts to someone other than your spouse could be subject to gift tax, or using up a part of your gift and estate tax exemption, unless you take advantage of one of three tax-free gifting strategies: the annual exclusion, the educational expense exclusion, and the medical exclusion. Here is an example of how wise parents/grandparents can strategically make gifts.
Our sample family, Olivia and Bob, have two adult children, one 18-year old grandchild and one infant grandchild. In 2020, they decide to give $30,000 to one adult child to help her start a business and $30,000 to the other adult child to help him with the purchase of a new home. Those gifts fall within the annual gift tax exclusion, which allows a person to give up to $15,000 to someone other than a spouse without triggering a gift tax liability. Married couples can combine the exclusion to give away $30,000 annually. Next, Olivia and Bob decide to pay the college tuition for their 18-year old grandchild’s freshman year. That tuition is $35,000. (Thank you grandma and grandpa.) This gift is made tax free so long as it is paid directly to the college and covers only tuition. Olivia and Bob could also give their grandchild up to $15,000 gift tax free for other expenses. Finally, Olivia’s and Bob’s infant grandchild spent several weeks in the neonatal ICU. Olivia and Bob decide to pay $25,000 in medical expenses directly to the hospital. Like the educational exclusion, the medical exclusion requires that the payment be made directly to the health care provider or the insurance company. In all, Olivia and Bob gave $120,000 to their children and grandchildren without incurring a gift tax or using their gift and estate tax exemption.
Keep in mind that gifts to a spouse are exempt under the unlimited marital deduction and the educational and medical costs of your own dependent children are expenses (not gifts). Gifts exceeding the annual exclusion will be counted against the gift and estate tax exemption, which increased to $11,580,000 per person in 2020. If Olivia alone had given each of her adult children $115,000 (for a total of $230,000) then $30,000 would be gift tax free because of the annual exclusion and the remaining amount would use up $200,000 of her gift tax exemption. She would be required to file a gift tax return and her gift and estate tax exemption would be reduced to $11,550,000.
Managing life-time gifts is part of a carefully considered estate plan. At Braun & Gresham, we assist clients with these strategies that support their families and achieve their goals of passing on their legacy.