7 Smart Gift-giving Strategies for Your Estate Plan

It’s a nice thing to be able to give someone you love a gift, especially when that gift can help ensure their security, wellbeing, and even happiness. But you have to be careful when giving gifts—either cash or property.

The annual gift tax exclusion is $16,000 per recipient in 2022, or—if you and a spouse are making the gift jointly—$32,000 per recipient. If you want to give gifts in excess of those amounts, you need to be strategic about your approach so that you can maximize the gift while minimizing the tax liability.

Here are a few tips that can help you do just that:

1. Make direct gifts for tuition or medical expenses. The Federal gift tax law allows for unlimited gifts if those gifts are in the form of direct payment for qualifying education (tuition, books, fees, but not room and board) or medical expenses.

2. Contribute to a 529 plan. If a loved one is saving for college, 529 plans can offer a lot of advantages from an estate planning perspective. In addition to the fact that contributions qualify for the annual gift tax exclusion, a 529 plan also allows donors to combine up to five years’ worth of exclusions in one lump sum (up to $80,000 per beneficiary). These plans are also very flexible, allowing the plan owner to change the beneficiary at will and also retrieve assets from the account at any time for any reason.

3. Make direct payments to cover bills. Instead of gifting the money to an individual, you can choose to make direct payments for things like summer camps, vehicles, vacations, and other items. This can be a good solution in cases where it’s preferable to avoid giving cash.

4. Choose when to give your gift carefully. While most people wait until the end of the calendar year to make gifts, there are advantages to giving early or at a specifically strategic time. Giving early in the year, for instance, transfers any appreciation-based income from the donor’s tax return to the beneficiary’s. You might also choose to give a particular gift when the value of the asset in question is down based on market prices or some other criteria.

5. Give gifts that will likely appreciate in value; hold onto those that have already appreciated or have depreciated. Cash is nice, but it’s also very easily spent. Sometimes, it’s a better option to give someone property that you expect will appreciate over time. This not only deters them from liquidating the asset in the short term, it also removes the future appreciation from your estate tax free.

6. Choose your property gifts wisely. You want to hold on to properties that have already appreciated substantially while you’ve owned them because your gift recipient will be subject to the same tax basis you had in appreciated property. This means that if the beneficiary sells the property, they will owe capital gains on the overall appreciation, not just any appreciation that occurred after the property was gifted.

At the opposite end of the spectrum, it’s best to hold onto a piece of property if its value has decreased while you’ve owned it, otherwise you forfeit your right to deduct the loss. A better option in such circumstances is to sell the property, deduct the loss on your own return, and gift the cash proceeds.

7. Include contingent beneficiaries in your trust. You can make trust contributions up to the annual gift tax exemption amount for each beneficiary of certain irrevocable trusts. So, for example, you may set things up so that your children are the main beneficiaries while your grandchildren are contingent beneficiaries. In this case, your total tax-free contribution will amount to the $16,000 annual times however many beneficiaries and contingent beneficiaries you have on the trust. However, the irrevocable trust must provide that each beneficiary has the right to withdraw the gifted amount (known as a Crummey power) annually for this strategy to work.

One Key Mistake to Avoid

In addition to taking advantage of these strategies for maximizing your gift-giving, it’s good practice to watch out for common pitfalls like forgetting to update your Will after giving a gift during your lifetime.

It’s not unusual for a person’s Will to include cash gifts designated for specific individuals. But sometimes, the person might end up giving that gift while they are still alive.

The issue is that even if an intended gift was given prior to the deceased’s passing, the gift specified in the Will still stands.

This is because there’s no way to determine that the person giving the gift didn’t intend to give two gifts. In some cases, the recipient of the gift might be willing to confirm an early receipt of the gift and relinquish their claim on the gift included in the Will, but that’s not always the case.

Give with all your heart, but also use your head.

While there are plenty of considerations to keep in mind when planning your strategy for giving gifts, that shouldn’t put a damper on your sincere desire to look out for your loved ones during and after your lifetime.

We can help you come up with a customized strategy that will maximize your gift-giving options while minimizing the tax burden for you, your estate, and your current and future beneficiaries. Contact us with any questions. We’d love to help.