Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

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Some Thoughts on Gifting

This commentary is provided by an author who is both a senior lawyer on the one hand and a father and grandfather on the other.

Much of the advice that lawyers provide to their clients regarding gifting has been tax motivated - focused on moving family assets down (or across) family lines. The idea is often to move assets down a generation tax-free on three levels - to remove assets from a taxable estate, to tax income to younger generations at a lower rate, and to remove future appreciation from the elder generation which may be subject to estate tax.

Clients and their counsel have been mindful of two separate but related protections from federal gift and estate taxation: the gift tax annual exclusion and a lifetime exemption. By the way, Colorado has neither a gift nor a death tax.

Incidentally, demographic studies suggest that a relatively smaller percentage of family wealth is passing at death to children and grandchildren. Several reasons are suggested:

1. More current asset depletion by expenditures to finance children(s) and grandchildren(s) education;

2. An increase in life expectancy coupled with;

3. Increase in medical costs which are depleting a greater portion of parental assets which would otherwise pass to children.

An individual may make annual gifts to any person (not just relatives) at a statutory annual exclusion limit, presently $14,000. In addition, a gift may be made by direct payment of certain medical and educational expenses which do not count against the $14,000. Annual gifts in excess of $14,000 require the filing of a gift tax return, but normally do not require the actual payment of a tax (rather they decrease the lifetime exemption discussed below).

On account of a marital deduction, available both with respect to lifetime and testamentary gifts, unlimited amounts can be transferred free of transfer tax between spouses.

Traditional advice, particularly to elderly clients, is to make annual exclusion gifts early in the year as a hedge against the possible loss of the exemption amount on account of a client’s death prior to year-end.

The design of lifetime giving has been dictated largely by the level of the lifetime exemption from tax. In times when that exemption was relatively low, there was more pressure to make maximum annual exclusion gifts so as to remove the assets from the possibility of being taxed at death.

With the increase in the lifetime exemption to $5.4 Million (doubled for a married couple) this tax motivation has been removed for the majority of clients with combined estates less $10,800,000. What this means is not that clients should stop making gifts, but rather they should focus on more personal and family considerations. The time when our children and grandchildren have their greatest financial needs are during their youthful and middle years. The costs of educating and otherwise providing for our grandchildren may be beyond the current financial abilities of our children. Gifts made to family members now will be of much greater benefit than simply dividing up what is left at the time of our deaths.

Charitable giving continues to have a tax motivation component, since the amount of charitable gifting is generally deductible for income tax purposes. It is possible, although probably unlikely, that attempts to reform the income system might involve the elimination of itemized deductions, including charitable deductions. The unmet social needs in our community may, however, increase if government support is diminished. Charitable giving will continue to be important and may be its own reward.

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