A Brief Guide to Year-End Gifting
Every year, the holiday season brings with it a few seasonal estate planning considerations. For reasons both festive and otherwise, this time of year many clients wish to make gifts to family, friends, or charities. The following article touches on a few of the most important things to consider when making gifts this holiday season.
For gifts to family and friends, the most important thing to know is that the 2020 annual federal gift tax exclusion amount is $15,000. This means a person can give $15,000 to as many indi-vidual recipients as they want and not have to worry about filing a gift tax return or paying any gift tax. Be aware that the $15,000 limit applies to the total amount gifted to each recipient through-out the year, not to each individual gift. If prior gifts have been made during the tax year, the amount a person can gift without being required to file a gift tax return or pay tax is reduced by the amount of such prior gifts. Also note that the $15,000 limit applies to individuals, so spouses may gift up to $30,0000 a year, per recipient, without worrying about gift tax consequences.
Many clients may wish to make these “annual exclusion” gifts to their young relatives, but may desire that the money be held in trust, if the young relative is not ready to manage their finances. The annual exclusion only applies to gifts of a present interest, so typically gifts to trusts are not eligible. However, a trust can be drafted so that the beneficiary has a temporary right to withdraw the distribution to the trust. If the beneficiary is properly notified of their right to withdraw (commonly referred to as a “Crummey notice”) the gift to the trust will qualify for the annual exclusion. A common practice is to set up a trust for the purpose of making yearly annual exclusion gifts to the trust.
Finally, itemizing taxpayers can receive an income tax deduction for gifts to 501(c)(3) (and some 501(c)(4)) charities. Around the end of the year, when taxpayers have a good sense of their yearly income, is a good time to consider whether to take advantage of this charitable deduction. Taxpayers should keep in mind the distinction between 501(c)(3)s and other charitable entities, so the taxpayer does not mistakenly make a gift that will not qualify for the deduction.
Of course, ever since the Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 beginning in 2018, far fewer taxpayers are itemizing. For those who typically take the standard deduction, one strategy to take advantage of the charitable deduc-tion is gift bundling. This is the practice of making significant gifts in one year, rather than making smaller gifts over the course of multiple years. For instance, a taxpayer who made gifts of $12,000 in consecutive years may find no benefit to itemizing. However, if the taxpayer instead made one $24,000 gift, itemizing and taking the charitable deduction would provide a benefit over the standard deduction for the year of the gift. Taxpayers should keep in mind that, for most gifts, the charitable deduction is lim-ited based on adjusted gross income (“AGI”), typically to 60% of the taxpayer’s AGI.
Finally, those with charitable intent and IRAs should consider directing a distribution from the retirement account directly to charity. These direct distributions can count toward a required minimum distribution, with some restrictions, and by making a qualified charitable distribution, income tax on the distribution can be avoided.
If you are interested in making year end gifts to family, friends, or charities, we at Stokes Lawrence would be happy to assist. Please contact a member of the Stokes Lawrence Estate Planning Group.