TIS THE SEASON FOR GIFTING...LEGAL IMPLICATIONS

By Christen E. Bourne, Attorney at Law

During the holiday season many of us are frantically searching for the perfect holiday gifts for our loved ones. But we must not forget to add yet another thing to our holiday to-do list—considering any legal implications which may result in your loved ones receiving less than what you intended to give. 'Tis the season to pause and reflect on the Federal gift and estate tax. ​

The Federal Gift Tax

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than the full value, in return.[1] Just as it sounds, the gift tax is quite literally a tax on the holiday spirit (i.e., taxes applied when giving and receiving nothing in return). However, even Ebenezer Scrooge could fall victim to the gift tax as the tax applies whether or not the donor intends the transfer to be a gift.[2]

IRS Gift Tax Exclusion Limits

The IRS does allow individuals to give away a specific amount each year tax-free; this amount is called the annual gift tax exclusion. Currently, the annual gift tax exclusion is $15,000 per donor, as to each recipient; this amount will increase in 2022 to $16,000.[3]

This means you are allowed to give up to $15,000 of gifts to as many people as you wish this holiday season without having to report these gifts to the IRS. Be aware, however, that it is the total amount of gifts given to the recipients that is calculated, not the individual items gifted. Accordingly, one gifted item exceeding $15,000 and several gifted items totaling over $15,000 (to the same recipient) are treated the same. ​

However, the Federal gift tax can be avoided on those gifts exceeding $15,000 with strategic estate planning. Accordingly, we recommend consulting with an estate planning attorney regarding a comprehensive estate plan that meets your needs. ​

Gifting Rules and Medi-Cal

Briefly, it is important not to confuse the above with the gifting rules associated with qualifying for Medi-Cal, as they are completely unrelated. If you enter a nursing home and apply for Medi-Cal, you will be subject to Medi-Cal’s transfer penalty rules for those gifts made within the 30 months prior to the date of your Medi-Cal application (i.e., Medi-Cal’s “look-back” period), even if those gifts were below the Federal gift tax exclusion.[4]

Gifting and the Federal Estate Tax

It is presumed that, in addition to giving our loved ones gifts during our lifetimes, we would also like to control how our assets are distributed to our loved ones upon our passing. To ensure that our loved ones receive the full amount of what we are leaving behind, however, we must be mindful of the Federal estate tax. ​

The Federal estate tax is a tax on your right to transfer property at your death. [5] When someone passes away, the value of their estate (i.e., everything they own) is measured as of the date of their passing.[6] If the value of their estate exceeds the current federal exemption amount ($11.7 million for 2021), a tax is imposed on the amount exceeding the exemption at a progressive rate.[7]

For 2022, the exemption amount will increase to $12.06 million. However, in 2026, the exemption will decrease to the 2017 exemption amount of $5 million (adjusted for inflation).[8]

Gifting and Estate Planning

Although you may be inclined, at this point, to become exceptionally generous this holiday season by giving away large portions of your estate while you are still alive in an effort to avoid the Federal estate tax, it is, predictably, not that simple. Instead, what you give away while you are alive is subtracted from the exemption rate applied at your passing.[9] ​

Said differently, your estate tax exemption is reduced by the amount of taxable gifts you made during your lifetime (e.g., lifetime taxable gifts totaling $6.06 million would reduce the 2022 estate tax exemption to $6 million).[10]

Because taxable gifts, as opposed to gifts that do not exceed the taxable exclusion, are subtracted from the exemption rate applied at your passing, gifts that do not trigger tax consequences can be used to minimize the size of your estate.[11] Other effective estate planning tools include the use of revocable and irrevocable trusts, which—when used correctly—can also lower estate tax liability.

Considering Gifting this Holiday Season? Talk with an Estate and Gift Tax Specialist

If the above seems complicated, that’s because it is. We strongly advise that you consult with an estate and gift tax specialist when considering these various estate planning techniques. Our attorneys are available to discuss comprehensive estate planning with you to determine the best course of action for your specific circumstances. Contact us today.

References

[1] https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
[2] Id. 
[3] 26 U.S.C.A. § 2503(b)(1)-(2)
​[4] http://www.canhr.org/factsheets/medi-cal_fs/html/fs_medcal_overview.htm#H
[5] https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
[6] Anna Brennan, What's Yours Is Mine: Protecting Your Family's Inheritance from the Federal Estate Tax, an Illustrative and Historical Guide on Irrevocable Life Insurance Trusts (2020) 47 W. St. L. Rev. 29, 31; See also 26 U.S.C.A. § 2033
[7] Id.; See also 26 U.S.C.A. § 2001(c)
​[8] 26 U.S.C.A. § 2010(c)(3)
[9] Anna Brennan, What's Yours Is Mine: Protecting Your Family's Inheritance from the Federal Estate Tax, an Illustrative and Historical Guide on Irrevocable Life Insurance Trusts (2020) 47 W. St. L. Rev. 29, 34
[10] Id.; See also 26 U.S.C.A. § 2001(b)(2)
​[11] Id. ​