Lifetime gifting

Learn ways to maximize your gifting and make it last a lifetime.

  • Private Wealth Management

Tax-free gifting strategies: Start here

The annual gift tax exclusion

For 2020, the Internal Revenue Service (IRS) allows individuals to make gifts of up to $15,000 per year to an unlimited number of individuals, with no federal gift or estate tax consequences. A spouse can give the same amount—doubling the amount a couple can gift. For example, a husband and wife with 2 children could give away a total of $60,000 a year to them—$30,000 to each child—without any tax repercussions. Once those gifts are made, that money is removed from their taxable estate.

Lifetime gift and federal estate tax exclusion

Individuals can give even more than $15,000 to any or all heirs and perhaps still not trigger a tax bill—by choosing to have the excess amount reduce the lifetime exclusion of $11.58 million (in 2020), or $23.16 million if both members of a couple are giving.

Tax-efficient trusts: The next step

Note

Generally, under current law, gifts made to charities are not taxable, nor are gifts made to cover tuition or health care expenses for another person, as long as payment is made directly to the service provider.

Beyond making tax-free gifts, individuals and couples can use other estate planning tools (such as specialized trusts) to make gifts during their lifetimes. One advantage of doing so is to shift future appreciation on quickly appreciating assets to the next generation while the grantor (also referred to as the "donor") is still alive, thereby using less of the grantor's lifetime federal estate and gift tax exclusion amount.

Irrevocable trust

This type of trust allows a donor to gift assets into the trust for the benefit of heirs. Beneficiaries can use the assets in the trust while the donor is still alive. And because the donor no longer owns the assets, the trust can be designed so that the trust's assets are excluded from that donor's estate for estate tax purposes. What’s more, the trust's design may shield those assets from the public probate process, as well as from creditors, bankruptcy, or a beneficiary's potential divorce.

Irrevocable life insurance trust (ILIT)

While a life insurance policy may help provide for the insured's heirs, payouts are typically included in the gross value of the insured's estate. If it looks like those payouts could push that value above the insured's lifetime gift and federal estate tax exclusion of $11.58 million (in 2020), the insured may want to consider an ILIT. An ILIT is set up to be recognized as the owner of the insurance proceeds, which in turn will keep them from affecting the insured’s taxable estate.

Grantor retained annuity trust (GRAT)

This type of trust allows individuals to move assets out of their estate while letting them benefit from the assets while they are alive. With a GRAT, a grantor transfers assets into the trust and receives fixed payments for a set number of years, known as the term. Then:

  1. The remaining assets are distributed to the trust's beneficiaries, and aren't included in the grantor's taxable estate.
  2. If properly structured such that the annual payment schedule is sufficiently large to result in "no deemed taxable gift of the remainder," or a "zeroed-out GRAT," the assets don't count against the grantor’s federal gift tax exclusion.
  3. If the grantor dies before the GRAT's term runs out, most (and usually all) of what's left in the GRAT will be subject to estate tax as part of the grantor’s estate.
 

Spousal limited access trust (SLAT)

For some couples, this type of trust may offer a way to take advantage of the lifetime gift and federal estate tax exclusion while benefiting from the assets. Here, the grantor makes a gift to the trust, and the assets are removed from the taxable estate—but typically a spouse may receive funds during their lifetime if the need falls within the terms of the trust. This can be an effective strategy for those concerned about permanently gifting away too much of their wealth during their lifetimes.

Charitable gifting solutions

Some lifetime giving strategies can help high-net-worth families make philanthropic donations while taking advantage of tax breaks, which in turn, may enable donors to make larger gifts. Here are a few of these strategies:

Outright charitable gifts

Charitable giving generates not only goodwill, but also has significant income tax and estate tax benefits for donors. The simplest form of charitable giving is the outright gift to a qualified charity. There are no gift tax consequences for gifts to qualified charities; the amount given is effectively removed from the estate for estate tax purposes, and the donor may receive a deduction for the amount of the gift on their income tax return in the year of the gift. However, the amount of the income tax deduction to a qualified charity may be limited to 20%, 30%, 50%, or 60% of their adjusted gross income (AGI), depending on the type of property given and the type of organization donated to. Charitable donations are only deductible if made to a "qualified" charity, which is a 501(c)(3) organization, as designated by the IRS.

Donor-advised funds

These programs allow grantors to make irrevocable contributions to a charitable fund, and then recommend how those assets are distributed to charitable organizations. Under current federal tax law, grantors can take immediate federal income tax deductions of up to 60% of their adjusted gross income for cash donations and 30% for appreciated assets. Typically, these funds are professionally managed, and grantors have considerable flexibility in suggesting how funds are distributed to charity over time.

Charitable lead trust

This type of trust may allow a charity to receive the income generated by the assets held in trust, and the value of the assets placed in the trust is removed from the grantor's taxable estate.* After a set time, the trust distributes the remaining assets to the trust’s beneficiaries.

Charitable remainder trust

This trust is similar to a charitable lead trust, but it operates in reverse. The donor or beneficiaries receive income from the trust for a set amount of time, and the assets remaining at the end of the term are distributed to one or more charities chosen by the donor. The donor receives a charitable deduction, based on the present value of the "remainder interest" that will go to the charities. Upon the donor's death, the value of the remainder interest going to charity is excluded from the grantor's estate for estate tax purposes.