While several of the succession planning articles in this space have showcased or will showcase sophisticated solutions for business owners and high-wealth individuals, we also would like to offer some simpler alternatives that should be considered when executing a comprehensive succession plan. Perhaps the easiest alternative of all is gifting.
Standard Gifts
Individuals can make gifts of up to $14,000 per year, per recipient under the annual “present interest” gift tax exclusion. Married couples filing jointly get to double that exclusion. While that might not sound particularly meaningful, putting numbers on paper really illustrates the power of this exclusion. If a married couple has two grown children, and they are each married with two children, that is a total of eight potential recipients for gifting strategies. That means that every year, $224,000 can be passed out of the estate without tax consequence. If the couple makes those same gifts over five years (assuming no inflation adjustments to the exclusion), that number increases to more than $1.1 million. Gifts between spouses are not subject to the annual gift tax limits.
Education and Medical Expense Gifts
In addition to standard gifting alternatives, a potential donor can pay medical or tuition expenses on behalf of the recipient, and have that entire amount exempted from gift tax without impacting the annual present interest exclusion. The tuition expense exclusion can cover any tuition from nursery school to graduate school. For example, if the children in the above scenario were in exclusive private schools, the grandparents could pay that tuition to the school, and could still give cash in the amount of $28,000 directly to the children under the annual exclusion. It is important that these tuition and medical expenses be paid to the educational institution or the medical provider directly in order to meet this exclusion.
Lifetime Exemption Gifts
For larger transfers, a donor always has the opportunity to avoid gift tax through the utilization of the lifetime exemption amount. In the scenario above, if the donors decided to give each of the children, in-laws, and grandchildren $100,000, then $28,000 would be excluded from gift tax under the annual present interest exclusion, and the remaining $72,000 per recipient would be offset by the lifetime exemption. There are a couple of drawbacks to this approach: first, the lifetime exemption is linked to the estate tax exemption, and every dollar of the lifetime exemption that gets utilized in gifting strategies will result in a dollar reduction of the estate tax exemption. For 2015, the lifetime exemption amount is $5,430,000.
Other Complexities
If an individual is thinking about making gifts in forms other than cash, then some complexities may be introduced. Primarily, these issues will relate to determining the fair market value of the gifts. More specifically, gifting shares of stock also can lead to very peculiar tax results for the recipient once he or she sells that stock. If an individual owns shares of stock that he or she wants included in a gifting strategy, tax treatment to both the donor and the recipient should be considered in order to maximize the tax benefit.
If you are interested in developing a gifting strategy, or if you want to talk about more comprehensive tax planning and succession planning opportunities, contact one of the experts listed below at PYA (800) 270-9629.
