Lifetime (Non-Charitable) Giving

Nicole Milici |

What is Lifetime (Non-Charitable) Gifting?

Gifting can be a powerful estate planning tool, allowing you to transfer your wealth to others during your lifetime. Lifetime gifts have many advantages over gifts you might leave in your will (these are called bequests, legacies, or devises). You might find making lifetime gifts desirable for non-tax reasons (e.g., personal gratification), or perhaps you'll make lifetime gifts for tax purposes (e.g., taking advantage of the annual gift tax exclusion), or your estate planning objectives may be the outcome of both non-tax and tax factors. 

You'll want to figure your own personal desires and the tax implications of making lifetime gifts to fully clarify your estate planning objectives. When you have selected what property to give, the process of completing the transfer may be fairly simple (e.g., giving cash) or more complex (e.g., transferring ownership of a business). Make sure that you follow through and properly transfer ownership (e.g., change name on titles).

What are the Non-Tax Advantages of Making Lifetime Gifts?

You see the recipient enjoy your generosity

Lifetime giving allows you the immediate satisfaction of seeing the recipient (the donee) enjoy your generosity. For many people, this is the most important reason for gifting.

You give your children financial independence

Most parents want to see their children enjoy the best possible life. Lifetime gifts to your children allow you to help them achieve financial security and a more worry-free life.

You are relieved of property management worries

Giving away your property can relieve you of the responsibility of managing that property, allowing you to enjoy a more worry-free life. This may be especially important if you are an older person.

You control the distribution of your property

Giving away your property while you are living allows you to decide who receives what property. If you die without a will, the intestacy laws in your state will determine how your property is distributed and you will have no say. You express how you want your property distributed after your death by executing a will. However, since you won't be around to see what actually happens (e.g., someone may disclaim your gift), you won't be able to react to any change in circumstances. Lifetime giving allows you to adjust your gifts to changing circumstances and, at the same time, provides the most control over how your estate is distributed.

You keep the property out of probate

Lifetime gifts can reduce probate and administration costs because property you give away during life generally is not included in your probate estate at death. Additionally, removing property from your probate estate keeps it from being vulnerable to estate creditors or unhappy heirs.

You keep the gift private

Lifetime gifts are not open to public scrutiny, unless, of course, you wish to make them so. In contrast, a will becomes a public document, available to anyone who wishes to see it. Lifetime giving assures your privacy.

What are the Tax Advantages of Gifting?

You may enjoy significant income tax and estate tax savings with a properly structured gifting program. To understand the tax advantages of making lifetime gifts, you must understand what constitutes a gift and how it is taxed.

Generally, a gift is not taxable income to the donee (the recipient). However, any income earned by the gift property, or any capital gain on its subsequent sale, is generally taxable to the donee. You, the donor, may be responsible for paying state and/or federal transfer taxes imposed on gifts you make. There are four transfer taxes that may affect your gift giving: (1) state gift tax, (2) state generation-skipping transfer tax, (3) federal gift and estate tax, and (4) federal generation-skipping transfer (GST) tax.

Eliminate Future Appreciation from Your Estate

One of the most common reasons for gifting is to remove an appreciating asset from your estate. An appreciating asset is one that is increasing in value over time. Removing the asset today keeps any appreciated value out of your estate later. The amount that may be subject to gift and estate tax will likely be less today than it will be in the future.

Take Advantage of Qualified Transfers

Qualified transfers are specific types of gifts you can make that are exempt from the federal gift and estate tax, and federal GST tax. A qualified transfer is any amount you pay on behalf of someone else, either as tuition to an educational institution or to pay medical expenses to a medical care provider.

This is a great way to help your children or grandchildren through college or to help your elderly parents get the proper medical care they deserve.

Take Advantage of the Annual Gift Tax Exclusion

The annual gift tax exclusion is a federal exclusion that allows you to give $15,000 (in 2018 and 2019) per donee to an unlimited number of donees without incurring federal gift and estate tax or federal GST tax. This exclusion allows you to distribute your property tax free and potentially put your estate into a lower tax bracket. The exclusion applies only to gifts of a present interest in property. For example, giving your niece cash today would qualify, but giving her the right to have your house in three years would not. Only certain transfers in trust qualify, and the rules are slightly different for gift and estate tax and GST tax purposes.

Take Advantage of the Gift and Estate Tax Applicable Exclusion Amount and the GST Tax Exemption

The federal gift and estate tax applicable exclusion amount is used to offset cumulative lifetime gifts and estates. The federal GST tax exemption works like the applicable exclusion amount for transfers made to skip persons (family individuals who are more than one generation below you and certain trusts for the benefit of such individuals). You may want to use the applicable exclusion amount and the GST tax exemption during your lifetime instead of waiting until your death because of the time value of money — money is worth more today than it will be tomorrow.

Some states may have the equivalent of the federal gift and estate tax applicable exclusion amount and GST tax exemption.

Potentially Reduce State Death Taxes

State death taxes are generally imposed on property you own at the time of your death. Removing property from your estate during life can minimize state death taxes.

Shift Income to a Lower Income Tax Bracket

Because the income tax rate schedules are graduated, your total family federal and state income tax burden may be reduced if income-producing assets are distributed among several family members rather than being held in your hands only.

Shift Capital Gains to a Lower Income Tax Bracket

Federal and state capital gains tax on the sale of appreciated property may be reduced by transferring the property to someone who is in a lower income tax bracket or who has losses to offset the gain.

Remove Certain Assets in Order to Qualify for Special Tax Treatment

You may receive special estate tax treatment if your estate meets certain percentage tests (a certain percentage of your estate consists of specific types of assets). Removing certain nonbusiness holdings may help your estate meet these tests and so qualify for Section 303 (redemption of stock), Section 2032A (special use valuation), or Section 6166 (installment payout of taxes) tax treatment.

Remove Tax Paid on Lifetime Gifts from your Taxable Estate

Although the tax you pay on lifetime gifts is tax exclusive, the tax paid on gift-at death transfers is tax inclusive. This means that funds used to pay tax on gift at-death transfers may be includable in your estate for estate tax purposes, while funds used to pay tax on lifetime gifts are not. You can save tax overall by making lifetime gifts, because the amount of the tax you pay on those gifts is removed from your estate.

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† Portfolio Solutions® does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. All information presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service, nor should it be construed as tax or legal advice.  Please click here to see our blog disclosure, which immediately follows the “Applicable Law and Venue” section.