Warshaw Burstein LLP | End of Year Estate Tax Planning
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End of Year Estate Tax Planning

With the holiday season upon us and gifting in mind, in 2022, you can make a tax-free annual exclusion gift of $16,000 to an unlimited number of individual beneficiaries. If you are married, you and your spouse can gift $32,000 together per beneficiary. Gifts at or under the annual exclusion amount do not use up any of your “unified credit”, your lifetime federal gift tax exemption. In 2023, the annual exclusion will increase to $17,000 per person or $34,000 for a married couple.

Gifts can be made of cash or of tangible assets such as stocks, real estate or shares of a family business. Gifting appreciable assets removes them from your taxable estate at current value. Future appreciation, of these assets would also be removed from your estate to grow in the name of your beneficiary. However, any capital gains tax due from appreciation and subsequent sale by your beneficiary will also belong to and be payable by your beneficiary. When gifting to minors, you may not want to gift directly to your beneficiary and may want to consider establishing a Trust, Uniform Transfers to Minors Act (UTMA) Account or 529 College Savings Program Account.

What Counts As A Gift?

The Internal Revenue Code (IRC) defines a gift as “the transfer of property by one individual to another while receiving nothing, or less than full value, in return”. Gift tax applies whether or not the donor intends the transfer to be a gift. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

However, there are a few exemptions.

Gifts Made to a US Citizen Spouse
Gifts to a US citizen spouse are covered by the unlimited marital deduction which permits you to give all of your assets to your spouse, either during lifetime or at the time of your death without incurring gift or estate tax on the value of that property. Spouses include same sex couples who are married. The unlimited marital deduction does not apply to domestic partners, civil union partners or non-citizen spouses.

Gifts Made to a Non-US Citizen Spouse
The marital deduction is not permitted for transfers to a surviving spouse who is not a U.S. citizen. However, you can make an outright gift to your spouse who is not a U.S. citizen of $164,000 in 2022 which increases to $175,000 for 2023. However, please note that a U.S. citizen can gift up to $12.06 million dollars during their lifetime or at their death to anyone, including a non-citizen spouse. For high net worth couples or for those planning for after the current exemption is expected to sunset, a QDOT (Qualified Domestic Trust) is an exception to this rule.

Direct Payment of Tuition to an Educational Institution
Direct payments of tuition to an educational institution are exempt from gift taxes, under section 2503(e) of the Internal Revenue Code of 1986. Tuition is narrowly defined by the Code as a direct payment to an educational institution at any grade level, college-level, higher ed, private-school for younger grades. Tuition does not include summer camp, daycare, tutor’s or payments to a nanny or au pair. It also does not include living expenses such as payments towards housing or books.

Direct Payment of Medical Expenses
You may also pay deductible medical costs directly to a provider for medical care. This includes payments for medical insurance, prescription medications or medical bills. This does not include adjacent needs such as a gym membership or exercise classes.

Please note that while these transfers do not reduce your unified credit and do not necessitate filing a gift tax return, that are NOT free and clear for Medicaid eligibility purposes and will cause a penalty if made during a lookback period.

Warshaw Burstein, LLP provides sophisticated and cost-effective planning services. We take an individualized approach and collaborate with a client’s financial advisor and accountant to understand our clients’ circumstances and personal goals. We then discuss the applicable laws and formulate a strategy with our client. We take great pride in crafting creative solutions that work.