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Estate Tax Planning: Why Annual Gifts Are Still Important
Thomas Kosinski

With the 2018 federal estate tax exemption being raised from $5.6 million to $11.2 million, some are wondering if making lifetime gifts to your loved ones may be less important than in the past. Even if your wealth is well below the exemption amount, a lifetime gifting program still offers significant estate tax planning and personal benefits.

Tax-free gifts

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include transfers within the annual gift tax exclusion — $15,000 per recipient in 2018 — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Given recent tax law changes, the estate tax may seem less important now. After all, the 2018 exemption amount of $11.2 million may be high enough to exceed the wealth of a vast majority of families. But there are no guarantees Congress will extend the law which expires after 2025, or that a future Congress may reduce that exemption amount. Lifetime gifts remove assets from your estate, including all future appreciation in value, providing some protection or insurance against changes in the law somewhere down the road.

Many states also provide a lower estate tax exemption amount, and therefore any gift program may help to reduce the potential cost of paying state estate tax in excess of their exemption.  For Illinois, the estate tax exemption remains at $4 million, so proper estate tax planning must take both exemptions into consideration to avoid a surprise due to the large difference in exemptions.

Taxable gifts

Taxable gifts (gifts over the annual exclusion amount) can also provide advantages. Although these gifts could exceed the exemption and be subject to tax (or more likely applied against your exemption amount), they can also reduce your tax liability by removing future appreciation from your estate. When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell the assets without triggering income tax or capital gains tax.

Assets transferred during life, on the other hand, retain your  tax basis, so the recipient could end up with a large tax bill should they sell them. Unless there is a future change to repeal the estate tax, the stepped-up basis rule would apply and retain the advantages of holding assets for life.

Beyond Taxes

Even if gift-giving offered no estate tax advantages, there are many nontax benefits to making lifetime gifts. For example, it allows you to:

  • Share with your family or children or grandchildren the benefits of your wealth;
  • Help with the burden of paying for education or medical expenses; and
  • Transfer business interests and plan for succession to the next generation.

By spreading out distributions over time or controlling the timing of your gifts, trusts can help protect your assets and prevent your heirs from misuse of the assets. Also, a trust can provide incentives for desired behaviors — for example, a beneficiary may be required to graduate from college or remain gainfully employed. Trusts can also serve as a safety net by making assets available to your beneficiaries in specific situations of true financial need.

Get with the program

Regardless of your level of wealth and whether you are likely to be subject to future estate tax, gift-giving continues to offer substantial tax and nontax benefits. To potentially consider some of these options and take advantage of these benefits, talk to your ORBA estate planning advisor.

For more information, contact Tom Kosinski at [email protected] or  312.670.7444. Visit to learn more about our Wealth Management Group.

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