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Gifts and Estate Planning

| Jan 7, 2020 | estate planning

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One aspect of estate planning that many people may be able to use to their advantage, particularly when it comes to taxes, is gifting. When it comes to gifts and estate planning, there are laws and rules in place both federally and in the state of California.

If you are interested in learning more about how to maximize your estate planning, the attorneys at Galanti and Copenhaver can help. Our attorneys have many years of experience handling all aspects of trust and estate planning litigation. Contact our office today to schedule a consultation with one of our attorneys.

What is Considered a Gift in California?

Before getting into the legal issues regarding gifts and estate planning, it is essential to understand what actually is considered a gift in this state. Per the IRS (International Revenue Service), a gift is defined as any movement of property or cash to another entity or individual without the expectation of something of equal or lesser value in return. Some examples of gifts include:

  • Jewelry

  • Cash

  • Any property, such as a car or a home

  • No-interest or very low-interest loans

  • Assets, like bonds and stocks

  • Financial accounts, such as retirement, bank, or brokerage funds

There are some exceptions to this rule that are not considered gifts for tax purposes. There are exceptions for medical and educational expenses that you pay on behalf of someone else–like your children or grandchildren. There is also an exception here for gifts that you give to your spouse. Finally, gifts to a political organization for its use are also not typically considered gifts for tax purposes. What does and does not constitute a gift can be vague, so if you have questions, it is best to speak with your estate planning attorney for clarification.

The Annual Gift Tax Exemption

Every year, the IRS sets an annual gift tax exemption. For the year 2020, this exemption is set at $15,000 per individual that you gift it to. If you are married and you and your spouse want to gift cash to an individual, the exemption is $30,000. If you, as an individual, gift a sum of over $15,000 to one individual person, or you and your spouse together gift an individual a sum over $30,000 this year, then you will need to report the gift to the IRS. If a gift tax must be paid, it is paid by the grantor (the person giving the gift), not the recipient. 

However, reporting the gift to the IRS does not automatically mean that you will need to pay a gift tax on it. If the grantor is under their lifetime gift tax exemption, there will not be a gift tax owed by the grantor. The lifetime gift tax exemption, as of 2020, is 11.58 million dollars.

As an example, if you and your spouse decided together to give each of your four children a gift of $25,000 this year, you do not need to report the gifts to the IRS since it falls under the annual exemption. As you can see, if you have substantial assets, you can use estate planning to make annual gifts to your beneficiaries in order to lessen the impact of taxes.

Upcoming Changes to the Lifetime Gift Tax Exemption to Keep in Mind for the Future

The lifetime gift tax exemption was raised substantially from five million dollars to ten million dollars for tax years 2018 through 2025, with dollar amounts to be adjusted each year for inflation. This change came about as part of the 2017 Tax Cuts and Jobs Act. As the current legislation is written, the exemption will revert back to the level that it was at in 2017, though still adjusted for inflation.

Given these changes, now is the time to take advantage of the increased lifetime gift tax exemption if this is applicable to you. As it stands now, the limit will be substantially lowered come 2026 unless additional legislation to increase this time period is enacted. You should also know that the IRS has issued a statement confirming that there will not be any adverse implications for individuals who choose to take advantage of the increased gift and estate tax exclusions from 2018 – 2025, once this exemption goes back to pre-2018 levels. Those who choose to make large gifts during this time period can do so knowing that they will not lose the tax benefit of the higher exclusion level after the planned 2025 decrease

Contact Galanti & Copenhaver today at 707-867-0787 or fill out our online contact form to see how we can help you with your estate planning needs.