Gifting before Sunset
How Legacy Intentions Guide Gift Decisions
The lifetime exemption, the amount (currently $13.61 million) you can give away during lifetime or at death without paying estate taxes, is set to “sunset,” or decrease by about half, at the end of 2025. There’s a chance it will not decrease. Congress could act to prevent it. The path of least resistance (i.e. Congress does not act or cannot agree) is the sunset. Preparing for this should be a priority for those who currently have a taxable estate or will have a taxable estate after sunset. This urgency has led to some people thinking seriously about gifting for the first time.
Whether to gift should start with intention. When you pass away, who do you want to receive your money? There are three categories of recipients: (1) people of your choosing, (2) charitable entities of your choosing, and (3) the government. Hardly anyone willingly picks the government. Your intention then boils down to how much to leave heirs verses how much to give to charity.
To minimize the government’s share, you have two more choices:
(1) a gifting strategy using the “freebies” of lifetime exemption and annual exclusion to move assets to your chosen heirs, or
(2) a charitable giving strategy. Assets left to charity avoid estate tax.
Many people worry about their children having too much and do not want to leave as much as possible to them. We see ultra wealthy families use charitable bequests to reduce a taxable estate, shunting those dollars that would be taxed to individual charities, donor advised funds, and family foundations. We also see ultra wealthy families direct more than the “leftovers” to charity. They may not fully utilize the lifetime exemption in favor of heirs. Where one falls on the spectrum comes down to intention.
If you are asking “how much is too much?” you probably aren’t looking to the government for answers. The lifetime exemption is a political football. Exemption is set based on tax revenue needs or is used to bargain for other items of legislation. If you have strong intentions about how much you want your children to inherit, best not to leave it to chance that the lifetime exemption matches that amount at your death. There’s an argument for gifting now, while exemption is known, to tailor the inheritance to your intention. If the exemption is a political football, do you want to play the game? Gifts made in trust can add structure and flexibility to help navigate the uncertainties of the future at least to a degree.
Maximizing what goes to heirs by leveraging annual exclusion and lifetime exemption is also extremely common. If the intention is to give Junior every cent, gifting needs to be considered. The lifetime exemption at an all-time high is a very powerful tool for achieving this end. It is not the only tool, but it is an efficient one moving assets, and importantly future appreciation, outside of the estate tax system in one go.
There’s a natural, warranted hesitancy about making large exemption gifts. $13.61 Million is a significant amount of money. In general, there’s an element of finality in making a gift. Too many strings attached, and the IRS won’t count it as a gift - they’ll include it in your estate anyway. There are tools that can give you access to the gift, particularly if you are married, but there is always an element of losing complete control over the asset. That’s scary, especially if this is new to you.
Wherever your intentions lie between heirs, charities, and government, now is a very good time to review whether the structures you have in place will still achieve your goals once the sun sets. Hopefully, we won’t see a decrease in exemption. I suspect, given enough time, we’ll see an even higher exemption someday. Thinking through your intentions, calculating whether you even need to gift, understanding your options, weighing the pros and cons of various structures, getting comfortable with the potential outcomes, and executing the plan all take time and professional guidance. Fortunately, we have just under two years before sunset. It’ll go fast.
