December brings us into the season of giving. Our clients look back at the year and reflect on what they have accomplished, while also looking forward to the new year and what they hope to accomplish. They reflect on their successes, and desire to share their success with loved ones. They also look for ways to create better lives for their loved ones in the process.

A part of their efforts may be realized in the form of giving tangible gifts. However, through one of the lesser utilized techniques in estate planning, our clients can provide for even greater gifts to their loved ones,  while receiving a benefit themselves in the process.

Our tax laws place a burden on generous givers in the form of a Gift Tax, which currently is a hefty forty percent (40%). However, donors (as the givers of gifts are called in the Tax Code) can take advantage of the technique known as Lifetime Gifting through the Annual Exemption Amount. The Annual Exemption allows a donor to gift up to $14,000, per beneficiary, without realizing a gift tax liability. A married couple can gift up to $28,000 per beneficiary using what is referred to as “gift splitting,” where each spouse gifts the Annual Exemption Amount to the same beneficiary.

Donors can make this technique even more robust by straddling the year, in December and January. For example, if two married donors give a gift, for example, on the last day of December and again on the first day of January, they can gift $56,000 to each beneficiary.

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  • This large gift is made to the beneficiary without income tax liability to the beneficiary or gift tax liability to the donors.
  • As a benefit to the donor, the amount gifted is removed from the total estate value of the donor, potentially reducing the future estate tax liability of the donor at death.

The $14,000 limitation does not have to be maximized to provide benefit, however. If the donor does not wish to gift the entire $14,000 in a single year, he or she can gift any amount up to that limit with similar benefits.

Lifetime gifting can be incredibly valuable to a donor who wants to experience the beneficiary enjoy the gift during lifetime. If, instead, the donor waits until after death to make the same gift, he or she will not get to see how the gift impacts the beneficiary’s life.

A logical question then is “what if the intended beneficiary is too young to receive a gift of that size?”

In this case, we would consider using a tool called a Gift Trust.

  • A Gift Trust allows the donor to gift the same amount of assets or cash as discussed previously to the Trustee of the Gift Trust.
  • The funds do not go directly into the hands of the minor beneficiary, but instead are held and used for the benefit of the minor by the Trustee.
  • Often a donor wants to put limitations on the Trustee’s use of the assets gifted into the Gift Trust.
    1. Certain limitations donors can place on the Trustee are called the “ascertainable standards.”
    2. There are four ascertainable standards that have been developed through years of case law. They include health, education, maintenance and support (frequently referred to as the “HEMS Standards”).
    3. The HEMS Standards represent the areas of need that a parent or grandparent would meet for a dependent or loved one. Instead, the Trustee uses the gifted assets provided by the donor to the Gift Trust to meet those same needs.

Whether through the use of out-right gifting or by way of a Gift Trust, annual exclusion gifting is a technique that allows the donor to observe the benefits received by the beneficiary during life, while at the same time potentially reducing the donor’s own taxable estate.

Our clients have the opportunity to maximize their gifts through these strategic giving options.


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