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Clients often employ annual gifting as a way to transfer assets (plus the future appreciation of those assets) to children or other individuals to provide them immediate financial assistance or as part of an overall estate tax planning strategy.

First, let’s take a minute to review the annual gift exclusion, lifetime exemption and the current estate tax landscape.

The annual gift exclusion is the max amount any individual can gift to any recipient per year without having to take further action. The amount for 2023 is $17,000. There’s no limit to the number of annual exclusion gifts that can be made each year staying within $17,000 limit. The cumulative amount gifted in excess of $17,000 to any person reduces the giver’s lifetime exemption.

The lifetime exemption is the amount an individual can gift during their lifetime (in excess of the annual exclusion) or pass at death free of gift or estate taxes. In 2023, the lifetime exemption is set at $12,920,000 per person.

The annual gift exclusion has remained fairly constant for decades, only increasing with inflation each year in one-thousand dollar increments. The lifetime exemption on the other hand has changed many times and is currently at its all-time highest amount of $12,920,000. The 2018 Tax Cuts and Jobs Act (TCJA) was the last piece of legislation that ushered in this historically high exemption amount.

A lot of uncertainty remains. The provisions related to most of the changes brought on by the TCJA will expire at the end of 2025. In 2026, it’s expected the exemption will revert to about $7 million. The estate tax rate itself will remain at the current 40% level.

“Gift splitting” is a way for married couples to consider the gifts made by one spouse as being made by both spouses.

This either allows them to give more each year or reduces the impact to only one spouse’s lifetime exemption. Splitting can be for annual exclusion gifts or for larger gifts made against one’s lifetime exemption.

The gift can be made with community property or a donor’s separate property. Texas along with eight other states are community property jurisdictions. Community Property means that property acquired during marriage (except through gift and inheritance) is equally owned by both spouses.

When giving community property, the automatic presumption is that the gift is one-half from each spouse. Only if the amount gifted is in excess of the combined annual exclusion limit of $34,000 ($17,000 x 2) would a gift tax return (Form 709) need to be filed to account for the excess made by each.

When gifting Separate Property, a gift tax return must be filed to make the split election and both spouses will need to sign the return to consent to the gift.

It’s important to note that when splitting gifts, ALL gifts made during the year must be split. Spouses cannot selectively split some gifts made during the year and not others.

For those clients facing taxable estates, gifting can be an effective way of “freezing” or stemming the future growth of the estate. The objective being to shift that growth elsewhere - whether that be another person or to a trust.

Of course, before making any gifts (which are generally irrevocable), your Wealth Advisor can perform a complete review of your wealth plan and capital sufficiency projections. This ensures that the client’s own needs will be met first and then factor in potential gifts made now or in the future.

Disclosures