The Twelve Days of Year-End Gifting

Christmas in the estate planning world always triggers thoughts of year-end gifting. I wish that I could say my family participated in this tradition, but nonetheless, many of my clients are considering the opportunities available for passing money or assets to other family members or charities this time of year. 

As some general background, this country has a gift tax system in place that will tax the donor of a gift over a certain amount. The current gift tax rate is 35%. Gifts are not taxed unless they exceed the “annual exclusion” amount—a de minimis amount determined by the tax code each year—and then the donor has a lump sum lifetime total gift exemption to run through before the donor is taxed. Currently, the annual exclusion amount is $13,000 per year, per person, and the lifetime gift exemption is $5 million per person over that person’s lifetime.

These exemptions do not apply to charitable gifts or gifts to spouses (unless the spouse is not a citizen), but they do apply to gifts to children. This is a common misconception. If you are providing more than $13,000 per year to your children ($26,000 per year if you are married), you are supposed to report those gifts on a gift tax return and you chip away at the total $5 million you can give away during your life.

This year and next year are special in that the lifetime exemption of $5 million is unusually high. In prior years, the gift exemption hovered more around $1 million and it is set to go back to that level in 2013. As a result, there are some unique opportunities to gift assets during the next two years.

With all of that in mind, this is my version of the Twelve Days of Christmas, in the twelve simple ways to gift at year-end:

1.       Give $13,000 checks under the tree for each child ($26,000 if you are married, and $52,000 if they are also married).

2.       Gift $13,000 to a 529 plan for a new grandchild (or up to $65,000 if you want to “front-load” the 529 with 5 years of annual exclusion gifts).

3.       Transfer the family cabin to an LLC, and gift units of that LLC to your kids or other family members.

4.       Transfer non-voting interests in your business to children and grandchildren, which is a great way to start the business succession process now without transferring control.

5.       Buy that Lexis for someone with a big red bow (but then report it on a gift tax return).

6.       Pay off a child’s mortgage or student loans and provide the child with an intra-family loan or mortgage instead at a current 30-year minimum rate of 2.8% (or 0.20% for terms 3 years or less, or 1.27% if between 3 and 9 years).

7.       Forgive the interest on the loan you made to your child last year.

8.       Or, forgive the whole loan you made last year.

9.       Equalize gifts to your children by offsetting loans to other children with cash.

10.   Transfer an insurance policy to your children.

11.   Provide a child with a down payment on a house.

12.   Provide a child with the capital to start a business.

*Be sure to contact your attorney and/or your accountant to discuss the nuances of gifting specific assets, and be sure to file a gift tax return next April if necessary.