In today’s high estate tax environment, it’s important to take advantage of as many of the tax savings opportunities that are out there. One of the best estate tax saving opportunities is to maximize the use of the annual gift tax exclusion. This means having parents or grandparents gift up to $15,000 (the annual exclusion in 2019) to as many family members as possible each year. Our recommendation is to make this a habit in January of each year. In large estates, each gift of $15,000 can save roughly $7,000 in estate taxes and even more in cases where gifts are to grandchildren, thereby avoiding the Generation Skipping Tax “GST.”
Although this can be an excellent tax savings, large families are often stymied by the different size and structure of each family unit. The grandparent often desires to treat each family unit equally, regardless of marital status of the child and the number of grandchildren. A carefully thought out plan should maximize the estate tax savings while working around the family structure issue.
Let me use an example of a grandparent gifting to children and grandchildren. We will use an example of four children. One child is married with four children, one is divorced with two children, one is single with no children, and one is deceased with one child.
The objectives should be:
- Maximize as many annual gifting units as possible
- Ensure each family unit receives the same gift
- The grandparent makes all of these gifts to reduce the size of their large taxable estate
Step One is to determine the family with the greatest number of gifting units. So the married child with four children sets that base. A $15,000 gift to each of them would get $90,000 out of the estate and save the heirs roughly $45,000.
Step Two is to gift each of the other family units a total of $90,000 and maximize the number or available annual exclusions.
So, in the case of the divorced child with two children, the grandparent gives $15,000 to each of the two grandchildren and $60,000 to the child. Since we have three recipients of gifts, we have excluded $45,000 from estate taxes and saved $22,000 for the heirs.
In the case of the single child, the parent makes a gift of $90,000 and we are able to exclude $15,000 and save $7,000 for the heirs.
In the case of the deceased child, a gift of $90,000 is made to the grandchild and we are able to exclude $15,000 and save another $7,000.
Overall, we have met all of our objectives by keeping the family units equal in the total amount that they receive. In this example we have gifted $360,000 out of the grandparent’s estate and saved $81,000 in estate taxes. For Oregon residents the gifts would not be added back to the estate at death and there would be an additional tax savings of roughly another $30,000 for a total savings of over $110,000. It should be noted, that gifts to individuals above the $15,000 annual exclusion amount are considered “taxable gifts” and will reduce the lifetime exclusion amount of $11,400,000 available to each taxpayer.
Every family is different, so give us a call and we can develop a gifting plan for your particular circumstances.