Lifetime gifts v bequests after death

Your Guide to State, Local, Federal, Estate + International Taxation

lifetime gifts, bequests, death administration, estate planning, estate tax, gift taxThe White House’s proposed tax reform plan includes repealing the estate tax. However, the “plan” is a one page outline with a bullet point simply stating “Repeal the death tax.” There are no details as to when this will occur. Moreover, the repeal could be short lived. As we saw back in 2010, the estate tax went away for just a single year, but only if an executor elected carryover basis, and came back again in 2011. Even if the estate tax is repealed, tax history has shown it may very well not be permanent. That’s why lifetime gifts may be a better option for you.

The current estate tax rules provide each individual with an exemption of $5.49 million (2017), just shy of almost $11 million for a married couple. Taxable estates in excess of the exemption are subject to an estate tax rate of 40%. For individuals whose estates are in excess of the exemption, it may still make sense to make lifetime gifts. The advantage of making lifetime gifts has to do with the gift tax being “exclusive” while the estate tax is “inclusive.” For example:

40% estate and gift tax rate

Make a $1,000,000 gift during lifetime, pay $400,000 to the IRS, this totals $1,400,000 (the gift tax is EXCLUSIVE from the gift itself)

To make the same $1,000,000 bequest at death, an estate needs $1,666,667 ($1,000,000 bequest and $666,667 in estate tax at 40%; the estate tax is INCLUSIVE within the estate).

Consequently, it takes $266,667 more in estate taxes to make the same gift.

CAUTION: Any gift tax paid within three years of death is brought back into the estate and is taxed. Thus, for this strategy to work, the donor needs to survive the gift for three years.

Thus, assuming an individual lives three years beyond making the gift, it is more advantageous to make the lifetime gifts.

Jennie Ward