These annual exclusion gifts can be made directly or they can be made to a Section 529 College Savings Account or Custodial Account under the Uniform Transfers to Minors Act or in trust for the benefit of their children or more remote decedents. However, if a trust is used, the Internal Revenue Code requires special provisions in the trust in order to qualify any gifts made to the trust for the annual gift-tax exclusion. For example, a limited power of withdrawal over a gift made to the trust, lapsing within a 30-day time period, can be used to qualify the gift for the annual gift-tax exclusion.
In addition to the annual gift-tax exclusion, there are unlimited gift-tax exclusions for school tuition paid directly to an educational institution and for medical expenses paid to the provider of medical care on behalf of another individual.
In the event a spouse is not a citizen of the United States, a gift to that spouse does not qualify for the unlimited marital deduction. However, it will qualify for an augmented annual exclusion gift to noncitizen spouses, which is currently $148,000 per year. In other words, clients can gift up to $148,000 annually to noncitizen spouses without incurring any gift tax as a result of the transfer.
There are also reasons to gift property that exceeds the annual gift-tax exclusion, making use of the federal gift and estate tax exemption previously discussed of $5.45 million, as adjusted for inflation. Although your clients may currently be using the gift and estate tax exemption, early use of this exemption avoids tax on all future appreciation. If the estate consists of highly appreciating assets, the sooner the asset or a portion of the asset is gifted, the more estate tax will be saved on the future increase in the value of that asset by the time of the client’s death.
In the next article, we’ll discuss life insurance, charitable gifts, basis step-up and the federal generation-skipping transfer tax exemption.
Debra Smietanski is a special counsel and estate planning attorney with Foley & Lardner LLP. She focuses her practice on complex estate-planning techniques for high-net-worth individuals, and is board certified by The Florida Bar in Wills, Trusts and Estates. She can be reached at [email protected].