United States: Year-End Gift And Estate Planning

Last Updated: November 10 2015
Article by Stacey Delich-Gould

Here in Rockefeller Center, holiday decorations are starting to go up, and preparations have already begun to welcome the tree – it feels as if year-end is right around the corner. Thankfully, there are two months left in 2015, but that means just two months to make important decisions about year-end estate planning. This Tax and Wealth Planning Pointer provides a quick view of the planning points to consider before you sing Auld Lang Syne.

Consider Your Year-End Gifting Plan

  • Gifts That Aren't Gifts

There are several types of payments a donor can make that will not trigger the gift tax. "Annual exclusion" gifts utilize the annual exclusion against gift tax, which for 2015 is $14,000 per recipient (this amount will remain unchanged in 2016). Thus, married couples can give $28,000 to each recipient in 2015, and the number of donees to whom you can gift is unlimited. In order to count as a 2015 gift, cash gifts must be made by 11:59 pm on December 31, 2015, and checks must be cashed before January 1, 2016. However, we strongly advise that you not wait until the last minute – if you have not already made your annual exclusion gifts, now is the time.

In addition to annual exclusion gifts, generous donors can also make unlimited payments on behalf of others directly to medical providers for qualified expenses or to educational institutions for tuition expenses without incurring a taxable gift.

  • Gifts Utilizing the Exemption Amount

In 2015, an individual can transfer up to $5.43 million without incurring any gift tax liability. This amount is often referred to as the "exemption amount," and it is indexed yearly for inflation. This is in addition to annual exclusion gifts. Upon death, the exemption amount translates into an estate tax exemption, meaning that $5.43 million (also indexed for inflation), less what has been used during the individual's lifetime by making gifts, can pass free of estate tax. (My August 2015 Pointer discusses the pros and cons of lifetime gifting utilizing the exemption amount.) If you want to consider a large gift utilizing all or a portion of your exemption amount, you should contact me or another adviser as soon as possible to discuss, so that the most effective strategy can be implemented before year-end.

If you have already utilized all of your exemption amount in prior years, remember that the exemption amount is indexed annually for inflation. The 2015 exemption amount is $90,000 more than taxpayers had in 2014 (when the exemption amount was $5.34 million). Thus, if you made irrevocable transfers to estate planning vehicles in prior years (e.g., to trusts for children), consider transferring an additional $90,000 this year ($180,000 for married couples). Any gifts utilizing your exemption amount should be reported to your accountant so that such gifts can be reported on your gift tax return.

  • Charitable Gifts

To qualify for the 2015 charitable deduction, gifts to charities must be made by December 31, 2015; checks must be sent by the 31st but need not be cashed by that date. Making gifts of appreciated securities to charity can be a tax-efficient strategy, as the donor receives a deduction for the full fair market value of the donated securities but does not recognize any gain on the appreciation.

Taxpayers who are at least age 70½ have been permitted to give up to $100,000 directly from their IRA to a public charity – this is often referred to as a "charitable IRA rollover." However, the legislation authorizing charitable IRA rollovers expired at the end of last year. Congress has yet to pass legislation extending this benefit, and there is no way to know if and when such legislation will pass.

Contributions to Retirement Plans

Consider maxing out contributions to your retirement plans. Contributions can be made on a "pre-tax" basis, which reduces your 2015 taxable income. For 2015, you can contribute up to $18,000 to a 401(k) or 403(b) plan ($24,000 if you are age 50 or older) and/or up to $5,500 to a traditional IRA ($6,500 if you are age 50 or older). Contributions to a 401(k) or 403(b) usually must be made by December 31, but transfers to traditional IRAs generally can be made until April 15 of the following year.

Stay Current with Income Tax Payments

You should review your withholding and estimated tax payments with your accountant, as underpayments of income tax can result in interest and penalties. A taxpayer must either pay 90% of his or her current year's liability (through a combination of withholding and estimated tax payments) or qualify under the "safe harbor" rule, i.e., paying in 100% of your prior year's income tax liability (or 110% if your prior year's adjusted gross income exceeded $150,000 for a married couple, or $75,000 if married filing separately).

Over the past several years, an increasing number of taxpayers have reported that their refunds are being delayed without any explanation from the IRS. Thus, while conventional wisdom has generally been that a taxpayer should keep current with his or her liability in order to avoid the assessment of interest and penalties, you should also be careful to ensure that you do not make a significant overpayment.

Review Your Current Estate Plan

  • Consider Whether Any Changes Are Necessary

From a tax and planning standpoint, there is no "magic" to reviewing your estate planning documents at year-end, but there is no time like the present to ensure that your current documents accurately reflect your wishes. Consider whether any significant life events have occurred since the documents were executed (e.g., births, deaths, marriages, divorces, etc.) that need to be reflected in revisions to your documents. If you have moved from one jurisdiction to another since the documents were drafted, it is a good idea to have your documents reviewed and updated by a practitioner in your current jurisdiction, as state and local tax laws and probate procedures vary. It is also prudent to consider whether some of your plans have changed, such as changes in guardians for minor children, changes in Trustees/Executors, or changes of outright distributions to beneficiaries to distributions in trust.

  • Contemplate New Strategies

One strategy is to create a Grantor Retained Annuity Trust (GRAT). Funding a properly structured GRAT can allow a donor/grantor to gift assets to a donee/beneficiary without using any of the donor's lifetime exemption amount and without the imposition of any gift tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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