As the New Year approaches, there are a number of planning techniques that individuals should consider implementing before December 31, and after the first of the year, to take advantage of estate and gift tax savings opportunities.

Gifts to Individuals

Individuals may limit the growth of their taxable estates by making annual lifetime gifts. The 2018 limit on such gifts – $15,000 per donee per year – will apply in 2019 as well. In addition, as is true for the current year, married couples will still be able to gift up to $30,000 to each donee in 2019, if each spouse gives the limit individually or if the donors agree to split joint gifts for tax purposes. It is important to remember that a donor is not limited to a certain number of annual exclusion gifts every year. Making annual gifts to multiple beneficiaries enables individuals to transfer significant wealth over time. The gift is considered to be made on the date the donee receives the gift. However, in the case of checks, the donee must cash the check before the end of the year. Since the gift tax annual exclusion is based on a calendar year, individuals also may wish to make 2019 gifts in early January.

Individuals interested in creating or adding to 529 Plan accounts for children or grandchildren should make the contributions before year-end and consider front-loading the accounts with five years’ worth of annual exclusion gifts. Individuals wishing to pay a beneficiary’s medical or educational expenses should make payments directly to the institution, not to the individual. If the payments are made this way, they will not be counted against the donor’s annual or lifetime gifting limits, so the donor can do both.

After a period of uncertainty at the beginning of this year, the federal estate, gift and generation-skipping transfer (GST) tax exemptions effectively doubled from $5 million per person (indexed for inflation) in 2017 to $11.18 million per person (indexed for inflation) in 2018. For married couples, who are able to elect for portability of any exemption amount not used by the first spouse to die, the combined exemption increased from $10 million (indexed for inflation) in 2017 to $22.36 million (indexed for inflation) in 2018.

The federal estate, gift and GST tax exemptions will increase in 2019 to $11.4 million per individual and $22.8 million per married couple. Utilization of the $11.4 million exclusion provides significant opportunities for lifetime gifting beyond the annual exclusion, educational and medical care gifts outlined above. Lifetime gifting is an effective strategy for the tax-efficient transfer of wealth because gifts remove future appreciation on transferred assets from an individual’s taxable estate. In states like Massachusetts where there is an estate tax, but not a gift tax, individuals can reduce their state-level estate taxes if they transfer assets through gifts instead of relying on testamentary transfers.

It is important to note that the significant increase in federal estate, gift and GST tax exemption amount is temporary and slated to expire at the end of 2025. In 2026, the exemption amount will revert to the prior $5 million per person, indexed for inflation. However, the Treasury Department and the IRS have issued proposed regulations stating that there will be no “clawback” on gifts made during the period of the increased exemption. This means, for example, if an individual makes a $7 million gift in 2019 and dies in 2026, after the exemption amount reverts to $5 million, such individual would not be subject to tax on the extra $2 million he or she gifted above the exemption amount applicable at his or her death. If the individual did not make the gift before 2026, his or her estate would be subject to tax on the additional $2 million.

Gifts to Charities

Gifts made to charities enjoy the dual benefits of reducing estate tax exposure and yielding current income tax deductions. Such transfers must be effectuated on or before December 31 in order for donors to reap the tax benefit in 2019, when 2018 tax returns are filed and income tax is due to be paid. It is important that donations be delivered to the charity before December 31, as the deduction is recognized on the date the charity receives the gift, not the date the check was written. The tax benefits of charitable gifting can be enhanced by gifting appreciated assets. By donating appreciated assets, the donor avoids capital gains tax that would have been realized upon a sale of the property. The charity can sell the property and benefit from its value without paying this tax. However, if a donor sells the asset and then donates the proceeds to charity, the donor would be subject to the capital gains tax on the sale.

There are certain charitable giving techniques by which individuals can make charitable donations and obtain a charitable deduction, but still retain an interest in the property for life or a certain term. Depending on the individual’s goals, these can be structured in many different ways.

Maximization of Income Tax Savings with QCDs and RMDs

IRA owners must begin taking required minimum distributions (“RMDs”) after age 70½, and these distributions are generally taxable income. It is possible, however, to reduce or eliminate such taxable income through use of qualified charitable distributions (“QCDs”). A QCD is a direct transfer of funds from an IRA to a qualified charity. When a QCD is made, the amount gifted to the charity is counted toward satisfying the IRA owner’s RMDs for the year but is excluded from his or her taxable income. Before QCDs became available to use, an individual traditionally would take a distribution from his or her IRA and then donate the amount of the distribution to charity. With this approach, the IRA distribution would be included in the individual’s income. The individual would then claim an itemized charitable deduction for the amount of the distribution. However, under the new tax law, many people will not benefit from itemized deductions and therefore, with the traditional approach, will not be able to offset the additional income with a charitable deduction. In contrast, the QCD strategy enables the IRA owner to reduce his or her income and resultant tax. In addition, because adjusted gross income determines the taxation of Social Security Benefits, Medicare surcharges, and other tax deductions, credits, and benefits, use of QCDs can have significant ancillary tax advantages.

It is important to note that QCDs are only available to IRA owners age 70½ and older. In addition, private foundations and donor-advised funds do not count as qualified charitable organizations for purposes of QCDs.

Review of Estate Planning Documents

It is advisable for individuals to review Wills, Trusts and other estate planning documents periodically. The end or beginning of each year is a good time for this. When reviewing estate plans, individuals should consider these questions:

  1. Do the provisions still accomplish your goals?
  2. Have your documents been updated to take advantage of changes to tax laws?
  3. Do your documents contain provisions that provide asset protection to your children, grandchildren and other loved ones?
  4. Are the fiduciaries named (Personal Representative/Executor, Trustee, Power of Attorney/Agent-in-Fact, Health Care Agent) still appropriate?
  5. Are your Durable Power of Attorney and Living Will on file with family members and health care providers?
  6. Have estate planning concepts, funeral arrangements and decisions on anatomical gifts been discussed with family?
  7. Are your life insurance policy and retirement plan beneficiary designations still appropriate and in line with your overall estate plan?
  8. Are bank accounts and other assets titled in line with your overall estate plan?
  9. For business owners, are buy-sell agreements and the related valuations and life insurance policies up to date?

Please contact any of the attorneys in Pabian & Russell, LLC’s Estate Planning practice group if you would like to discuss any of these matters.