One of the frequent things that pop up in the context of financial planning is the notion of gifting, particularly the $15,000 “limit” on gifts to non-spouses.
This $15,000 “limit” (in 2019) isn’t really a limit. One can give more than $15,000 per year, but should they give more than $15,000, you will need to file a federal gift tax return form (Form 709). This amount would then be deducted from your total estate tax exemption. This exemption currently is quite significant: currently approximately $11.2 million for an individual and $22.4 million for a couple; moreover, gifts given under current U.S. estate tax exemptions would likely be grandfathered in should the current levels not be renewed when they are due to expire in 2025.
As an example, should a grandfather wish to help his granddaughter buy a house, he could give her $100,000, file a Form 709 and still have an exemption of $11.1 million (an amount that only affects about 0.9% of Americans currently). Alternately, he could, in December 2019 and then January of 2020, give his granddaughter and her spouse $15,000 each for a total of $60,000 without having to either file Form 709 or reduce his exemption amount. Obviously, when the exemption amounts were lower, such a strategy was more relevant, but given the current estate tax landscape, the former strategy of a straight $100,000 gift is advantageous.
The second question is what to give. Generally, cash is the preferred gift, because investments come with a step-up in basis at death, eliminating any possible capital gains tax. Again, as an example, should the grandmother give $100,000 of IBM stock that she bought in 1965 with a cost basis of $1,000 -- the grandson would have to pay between 15% and 23.8% on the $99,000 of gains; whereas should the grandmother leave that as an inheritance the new cost basis would be stepped up to the value on death and the family would avoid approximately $15,000 to $20,000 in taxes. (As a side note, capital gains taxes mean that it is advantageous to give stock directly to charity, rather than selling it first. This means more for the charity in the end, as the charity will not have to pay taxes on the capital gains. For more on charitable giving, read Mitch’s blog on the topic). Consequently, a good rule of thumb is to give cash to family and appreciated assets to charity.
Given the long-term changes to the estate exemption amount, a strategic giving plan in the United States is less important in terms of limiting estate tax exposure than it once was; however, making sure to gift wisely can still impact one’s overall tax bill.