When a client comes in for an “estate plan,” they are usually thinking of a will or trust. These legal documents form the centerpiece of a comprehensive estate plan, but there’s another important tool in the estate planning toolkit that many people overlook: lifetime giving.
Do you know you can give money up to a certain amount, called the annual gift tax exclusion amount, every year, to as many people as you’d like? For 2021, this exclusion amount is $15,000, so you can give up to $15,000/person to an unlimited number of people in 2021 without owing any federal gift tax or having to file a gift tax return. If you’re married, your spouse can do the same, so combined, the two of you can give up to $30,000 per person each year.
For example, Jose and Sarah have an adult child, Chris, who is married to Bob. If Jose and Sarah want to maximize their gifts to Chris’ family, they can give a combined total of $60,000: $15,000 each to both Chris and Bob. If Chris and Bob have children, Jose and Sarah can each make gifts to the grandkids as well.
Lifetime giving has several benefits. First, lifetime giving can be as simple as writing a check. An attorney can help you plan out a lifetime giving strategy and incorporate it into your overall goals, but legal assistance is not required to make lifetime gifts. Second, lifetime giving allows you as the giver to decide exactly who gets what and to apply any preconditions you may wish. Also, you have the satisfaction of seeing the recipients enjoy your generosity and they have an opportunity to express their appreciation. In addition, lifetime gifting enables you to act when it is most needed, for example, to help a grandchild go to college, buy a house, or start a business.
Finally, gifts that do not exceed the annual gift tax exclusion amount don’t count toward your lifetime combined estate/gift tax exemption, which is another benefit. That said, the estate/gift tax exemption amounts are so high (currently $11.7 million/individual and $23.4 million/couple) that estate tax avoidance is not a relevant consideration for most of us.
On the flip side, lifetime gifting does come with a few risks. The biggest risk is that the money you give away today may be money you later need for yourself. Second, while you can revise a will or trust to change distribution plans as your circumstances or wishes change, lifetime gifting can’t be undone in the same way. Once the toothpaste is out of the tube, so to speak, it can’t easily be put back. For some people, these considerations may limit the practical value of the gift tax exclusion.
And for clients who may need long-term care in the foreseeable future, it’s important to know that Medicaid has a five-year lookback rule. If you make gifts today and apply for Medicaid within the next five years, your eligibility will be affected.
Many people may already be doing lifetime gifting in an informal way, such as small checks on birthdays. For some clients, greater lifetime gifting isn’t appropriate at this stage of life. For others, however, planned lifetime giving using the gift tax exclusion can be an easy, efficient, and satisfying way to distribute a significant amount of property.
Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and practices probate, estate planning, and guardianship law. She was selected as one of “DVAP’s Finest” for her pro bono volunteer efforts through the Dallas Volunteer Attorney Program; she is a member of the Dallas Bar Association Probate, Trusts, & Estates section; a member of the estates manual committee; and a former co-chair of DAYL Elder Law Committee. Ms. Williamson assists with the creation and delivery of many continuing legal education programs for attorneys and enjoys speaking about estate planning and probate topics for senior groups and others. She earned her J.D. from SMU Dedman School of Law.