Use gifting strategies to reduce tax liability
The time for year-end tax planning is now, especially with the impending changes outlined in the (BBBA), set to be implemented at the start of 2022.
One of the major changes affects high-net-worth individuals looking to make gifts to reduce their potential future estate tax liability. The maximum gift amount without incurring the 40% federal estate tax is set to be reduced by almost half, from . As a result, individuals with substantial assets have been scrambling to make gifts before the end of this calendar year.
Gifting money and taxes
However, language in the House of Representatives’ proposal that was released on October 28, 2021, indicates an entirely new direction. It eliminates the intent to reduce the amount individuals can gift over a lifetime — at least for now.
While the most current BBB Act H.R. 5376 no longer contains modifications to the estate or gift tax exclusion amounts, the $11.7 million exclusion amount is still subject to a sunsetting provision. The exemption will be cut in half effective January 1, 2026, without any action from Congress. Congress can make changes until the last minute though, so taxpayers and their advisors should remain vigilant.
Gifting to reduce future estate tax liability
One way to reduce tax liability is through gifting using the annual exclusion for gifts, which currently remains at $15,000. This exclusion covers gifts made to an individual recipient in a tax year, allowing a taxpayer to make multiple gifts amounting to $15,000 without incurring taxes or using their lifetime exemption on gifts.
Any gift made to a spouse is not considered to be under the purview of the gift tax due to separate marital deduction policies. Gifting as a married couple increases your gift-giving capacity exclusion to $30,000 per recipient, but this scenario would require a gift tax return to be filed.
Original language in the BBBA also targeted gifts to trusts, like irrevocable life insurance trusts, spousal lifetime access trusts, and grantor retained annuity trusts (, , and ). This is no longer true in the current draft — although nothing is guaranteed.
The BBBA would have targeted these kinds of trusts even if they were established prior to the BBBA. It also includes future contributions to trusts that are included in the donor’s estate at death. It would still be possible to avoid some of these tax complications if this provision is revived. You could, for example, fully fund an ILIT to cover future life insurance premiums in a lump sum instead of making regular annual gifts to the trust that would be subject to taxes.
Gift when your value is low
Some business owners experienced a devaluation of their assets during the pandemic. As a result, now may be the time to transition the business to family members.
Often, the best time to gift is when the value of assets is low, so the amount of lifetime exemption used is also low. This allows you to transfer the most assets that could experience appreciation.
On the other hand, the basis of an asset that is received as a gift is a carryover basis, so that means the donor is also potentially transferring an income tax liability to the beneficiary. Taxpayers need to carefully weigh the options and discuss the impact of their decisions with their tax and legal advisors.
Charitable giving to reduce taxes
Another means of reducing your future estate tax liability and your current income tax liability is by charitable gifting. The 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act contains provisions that encourage additional charitable giving and have been extended through the end of 2021. These provisions allow for $300 above-the-line deductions for charitable gifts made in cash for non-itemizing taxpayers. It also increases the charitable deduction from an adjusted gross income cap of 60% to 100% for some contributions by taxpayers who itemize. It also increases the limit of the corporate tax deduction from 10% to 25%.
With the increase in these deduction caps, now is the time to discuss funding a donor-advised fund or other vehicles to accelerate charitable giving.
Continue the conversation
Wipfli’s private client services team can help you navigate charitable giving options, business transition decisions and associated tax considerations. If you need help with a year-end or overall estate plan, contact us.
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