Tier Two – The Medical and Educational Gift Rule
“The second tier is the biggest loophole in the tax code that most people don’t take advantage of,” said Slott. “You can give unlimited gifts to an unlimited group of people.”
The catch is that the gifts must be made directly to medical or educational institutions to pay healthcare bills or tuition and other educational expenses, rather than to the friend or relative, said Slott. But if the rules are followed, such gifts do not have to be reported to the IRS, he said.
Slott said that this type of giving is great for grandparents, particularly if they are concerned about how their gifts might be used.
“I call it targeted gifting, and grandparents like it because they know their gifts are going for the intended purpose,” he said. “Clients can get their money out if they have large estates and it doesn’t cut into the lifetime exemption—and it can be to any school, even pre-school.”
However these gifts cannot be used for custodial or long-term care, Slott said.
Tier Three – Using the Lifetime Exclusion Now
The third tier is actually using the $11.7 million lifetime gift and estate tax exemption—which doubles to $23.4 million for couples—before 2021 is over.
“Clients can use the whole $11.7 million in gifts now and lock in that exclusion, even though because of inflation it’s slated to go up to over $12 million next year,” said Slott. “Let’s say Congress makes a midnight change to one of these tax bills and cuts the lifetime exclusion or, in 2025, it’s slated to go down by half anyway. If you use it now you lock it in. There’s no claw back. The IRS has already ruled on this several times.”
Using the exemption now keeps with the long-standing tax planning strategy of locking in today’s low rates and loopholes as soon as possible, before policymakers can take them away, he said.
“You can do a lot of things quickly with cash gifts, not trusts, but regular cash gifts to family, and these three tiers of tax-exempt gifting can be done now,” said Slott.