Gifting for the Holidays

By Chad Halbur, CFA | President and Senior Investment Manager | Cornerstone Private Asset Trust Company

holiday giftingWith the holidays close at hand, now may be a good time to review the gifting rules in play for 2019 to see if changes are needed to any gifting strategies you have. Let’s start with a summary of the current gifting rules in effect for 2019.

Annual Exclusion Gifting

The first is the Annual Exclusion Gifting. For 2019 that number is $15,000. What this means is that that you can gift up to $15,000 to any individual without there being a tax imposed on the transfer. If you have 3 children, you could transfer $15,000 to each child for a total of $45,000 in gifts. If you are married, your spouse could also transfer $15,000 to each child for a total gift from your spouse of $45,000. Resulting in a combined gift between you and your spouse of $90,000 ($30,000 to each) to your children. What if I want to (or already have) gift more than $15,000 ($30,000 with gift splitting with a spouse) to one person? This is where the second rule comes into play.

Lifetime Gift and Estate Tax Exemption

The second is the Lifetime Gift and Estate Tax Exemption. For 2019 that number is $11,400,000. This means that you can give away up to $11,400,000 over your lifetime or at death without paying any gift or estate tax. To use the question raised earlier as an example, “what if you have already gifted more than $15,000 in a calendar year to an individual?” Let us use the name Sam throughout this example.

Let’s say Sam gifts $115,000 to his brother to help him. First Sam could use the $15,000 annual exclusion rule on the first $15,000. Does that mean Sam will have to pay tax on the $100,000 in excess that he gave his brother? No, instead that $100,000 will count against Sam’s $11,400,000 lifetime exemption, leaving Sam with $11,300,000 remaining of his lifetime exemption. Sam does need to document this when he files his tax return for the year. Sam’s accountant will file a gift tax return (Form 709) to report the amount of the taxable gift. In this example, assuming Sam makes no additional taxable gifts over his lifetime, he would be left with an $11,300,000 estate exemption to use at his death. An estate tax is a tax imposed on the transfer of assets after you die. If Sam died with a $10,000,000 “taxable estate”. Since Sam’s remaining lifetime exemption ($11,300,000) is larger than is taxable estate ($10,000,000), Sam would not have a federally taxable estate.

Each state has its own rules around a state estate tax. In Minnesota, the estate tax exemption is $2,700,000 in 2019, and this will increase to $3,000,000 in 2020. So, if you are a Minnesota resident and your estate is north of $3,000,000 ($6,000,000 if married) you should be looking at doing some planning. There are some attractive strategies to lower or reduce your state estate tax if you fall in this group.

Don’t Forget About the Freebies

  • Annual exclusion gifting
  • Gifts to spouses are generally unlimited
  • Gifts to charity are not subject to gift tax
  • Gifts for tuition and qualified education expenses can also not be subject to gift tax if paid directly to the educational institution (do not give money to the student or the student’s parent to pay the tuition)
  • Gifts to cover medical expenses for someone is also not subject to gift tax if the payment is made directly to the medical provider (do not give money to the patient to pay the bills)

Be Careful, There are Always Some Gotchas

Minnesota three-year look-back period

Minnesota is a state with a state estate tax (as discussed above). They also have a three-year look-back on lifetime transfers. The three-year look-back treats gifts made by a decedent within three years of death as part of the decedent’s Minnesota estate for estate tax purposes. This rule only applies to gifts that are subject to federal gift tax (meaning they are above the annual exclusion gifting limit). This means that gifts of $15,000 per individual could be made as “death bed” transfers without being pulled back into the decedent’s estate.

Medicaid five-year look-back period

Medicaid (different from Medicare) is a healthcare program designed to help people in need. Medicaid has a five-year look-back period on any gift given in the past 60 months from the date of application. If you make any gifts in this 60-month period, those gifts will result in a penalty period from Medicaid coverage. Any gifts of any size will be considered part of the total gifts (not just gifts which are subject to federal gift tax as referenced above). The basic idea is any gift given in the past 60 months could/should have been used for your care, and that total will be divided by the average cost of care per month. Let’s say the calculation is 3.2 months. Then you will be required to pay for care for 3.2 months from other sources before becoming eligible for Medicaid coverage. Medicaid is administered by each state which means each state will have its rules for what amount of assets you can own, and which assets are counted in that formula. The website provided by the American Council on Aging has some great information to help you with a working knowledge of how the system operates.

Always consult your tax advisor and attorney when implementing any tax strategies.

If you have questions or would like to learn more, contact Chad Halbur at [email protected].

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