Don’t Be A Turkey – Use Your Annual Per Donee Exclusion Amount

As the Thanksgiving holiday approaches, we will gather with our family, friends, and loved ones to give thanks for our blessings and consider all that has transpired in 2021. It’s been a wild year that started with a riot in our nation’s capital, saw Elon Musk become the richest man in the world, surpassing Jeff Bezos (query whether his space expedition played a role in his fall from the top spot), the Delta variant sweep the nation, the United States end its longest sanctioned war in Afghanistan, Peter Thiel reveal the value of his Roth IRA exceeds $5 billion, and Congress flirt with legislation which would make drastic changes to the Internal Revenue Code (the “Code”), which has yet to pass. Despite the tumultuous year in which we continued to feel the impact of the COVID-19 virus with shortages and supply-chain issues, it’s easy to find reasons to be grateful. Folks have reunited with their families and loved ones and travel has begun to resume to pre-pandemic levels. This time of the year offers a special opportunity to show our loved ones just how much we care as gifts accompany the holiday season.

Let’s make this year the year we give gifts with dual purposes, gifts that benefit both the recipient and the donor. Annual exclusion gifts provide a benefit not only to the recipient, but also to the donor because they allow the donor to make gifts to multiple individuals without incurring any transfer tax consequences provided that the total gifts to an individual do not exceed the threshold amount. Code Section 2503(b) sets the amount that an individual taxpayer can gift to any other person at $15,000 for 2021. Beginning on January 1, 2022, that amount will increase to $16,000. Giving now can be a great way to reduce the value of the taxable estate without impacting the lifetime exclusion amount, $11.7 million in 2021 and rising to $12.06 million in 2022, while at the same time, providing the opportunity to divert potential appreciation on that asset to the beneficiary, thereby removing it from the donor’s taxable estate.

The Code imposes no limit on the number of annual per donee exclusion gifts per taxpayer meaning that an individual taxpayer may gift up to that $15,000 amount to an unlimited number of individuals without ever worrying about estate or gift tax consequences. Gifting the funds or assets removes them from the donor’s taxable estate without ever impacting the lifetime exclusion amount. It’s one of the few totally “free” estate planning techniques. Because annual gifts reduce the size of the taxable estate, they also reduce the potential tax liability. For married couples, the benefit doubles because each spouse can gift the annual per donee exclusion amount to the same individual and if the recipient has a spouse, that presents another opportunity to double the impact. Let’s review an example that demonstrates the effectiveness of annual exclusion gifting.

Assume that Mike and Carol recently became empty nesters after Cindy married her long-time love, Nikki, on New Year’s Eve, 2021. At the wedding Mike and Carol announced that they had spoken with their estate planning attorney who advised them to begin making annual exclusion gifts to reduce the value of their estate. Mike and Carol distributed 12 envelopes, each containing $30,000 cash, to each of Greg, Marcia, Peter, Jan, Bobby, and Cindy, and their spouses. As the clock strikes midnight, the family rings in 2022, and Mike and Carol hand out another set of envelopes, this time, with $32,000 cash.

In the example above, in twelve hours, Mike and Carol gave away nearly $750,000 without incurring any estate or gift tax consequences. Mike and Carol each gave $15,000 to each of their six children and their spouses, totaling $360,000 in 2021, and Mike and Carol each gave $16,000 to each of their six children and their spouses, totaling $384,000 in 2022, for a total of $744,000. In fact, Mike and Carol could each also gift $15,000 to a grandchild in 2021 and $16,000 to that same grandchild in 2022. The foregoing example demonstrates how quickly these gifts add up and make a huge impact on an estate. In addition to using the annual exclusion gifts, the Code gives taxpayers a tax-free pass when they pay the medical bills of another individual or pay the tuition bills of a student. The Code imposes no limit on the amount of these medical and tuition gifts, as long as the amounts are paid directly to the provider. The Code also allows contributions to charitable exempt organizations. The Code imposes no limit on the amount of these contributions for gift tax purposes, which provides another easy option for those who want to do some easy estate planning. Such contributions may also qualify for an income tax deduction, up to certain percentages of the taxpayer’s income.

The looming holiday presents the perfect time to consider these and other estate planning issues. Giving now, rather than waiting until death provides several estate planning opportunities in the form of tax-free distributions, reduction of the gross estate, and appreciation outside of the taxable estate, not to mention the benefit to the recipient that the donor will witness while alive. An Estate Planning attorney can help you explore this opportunity in more detail and determine whether it makes sense for your family situation.

Options may exist for use of the annual exclusion gifts in conjunction with trusts and a long-term estate plan. In this case, it really is better to give than to receive.

Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com