First, I will qualify my answer by indicating that anyone reading this response should seek individualized estate planning advice which matches your individual goals and objectives. As a little background on the topic, congress recently worked to pass Tax Cuts and Jobs Act (TCJA) into law a few years ago. The passage of the TCJA raised the lifetime estate tax exemption up to $11.4 million per person and is subject to rising gradually over time due to this exemption being indexed to inflation. Also, the TCJA raised the annual gift exclusion amounts up to $15,000.
Due to the increase of the estate tax exemption up to $11.4 million dollars, there are fewer individuals that need to worry about their estate being taxed at the federal level. Speaking generally, If a single person dies, they can pass on their estate assets to other individuals without the assets being subject to the 40% federal estate tax rate. A married couple could take steps to have almost $23.0 million dollars of assets passed through either will or trust and escape the 40% tax rate. However, let's say you are one of the more fortunate individuals whose estate surpasses the lifetime estate exemption. One way to reduce the taxable assets of your estate is to make inter vivos gifts. Any person can give away $15,000 per year to any number of people and not have it count towards your lifetime exemption. This possibility allows for many estate planning opportunities that should be discussed with your personal estate attorney.
In addition to potential tax savings that can be derived through making gifts during life, there are several more practical reasons to give gifts during your lifetime rather than allowing them to pass after your death. First, you are able to experience the individual's use of the gifts that you have given them. For obvious reasons, you would not be able to have these experiences with the intended beneficiaries after your gone. Second, the beneficiaries of your gifts might be in more need of the gifts now than potentially years later. For example, let’s assume your children are now adults with children of their own. These years in your children’s lives are generally when they will experience their most significant potential hardships and needs for financial help. I am sure that most people will be happy to receive an inheritance well into their 50s or 60s; however, there is a good chance it would be more needed a little earlier in life. Third, you are ensuring the gift is being given to the intended beneficiary. There is a possibility that your will, trust, or other tools you have set up to transfer your assets to your intended beneficiaries might not stand legal muster potentially leading to your assets not necessarily being distributed exactly according to your wishes. One way to ensure your gift is given to the intended target is to be able to give it personally.
While there are many other potential benefits and strategies that could be mentioned regarding making life gifts, I will leave it at the three listed above. Whether your well exceedingly wealthy or you’re an average person with a little extra discretionary income, there are benefits to making gifts. With proper planning, you can potentially receive some beneficial tax savings.