Take Advantage of Your Annual Per Donee Exclusion Amount

As we gather with our family, friends, and loved ones to celebrate Thanksgiving, while year-end obligations may tempt us to rush through the meal and return to “normal,” we should not. Instead, we should stop, savor the moments together, and remember why we choose to spend our time with these individuals. This time of the year offers a special opportunity to show our loved ones just how much we care. We can do this in any number of ways, including gifting.

Let’s make this year the year we give gifts that benefit both the recipient and the donor. Annual exclusion gifts provide a benefit not only to the recipient but also to the donor. Annual per donee exclusion gifts allow the donor to make gifts to multiple individuals without incurring any transfer tax consequences provided that the total gifts to an individual are present interests and do not exceed the threshold amount. Internal Revenue Code (“Code”) Section 2503(b) sets the amount that an individual taxpayer can gift to any other person at $16,000 for 2022 (which will rise to $17,000 for 2023). Giving now allows individuals to reduce the value of their taxable estate without impacting the lifetime exclusion amount of $12.06 million in 2022 (which will rise to $12.92 million in 2023). In addition to allowing the donor to avoid the use of any applicable exclusion amount, gifts remove future appreciation on the assets gifted from the donor’s estate as well.

The Code imposes no limit on the number of annual per donee exclusion gifts per taxpayer meaning that an individual taxpayer may gift up to that $16,000 amount to an unlimited number of individuals without ever worrying about estate or gift tax consequences. Gifting the funds or assets removes them from the donor’s taxable estate without ever impacting the lifetime exclusion amount. It’s one of the few totally “free” estate planning techniques. Because annual gifts reduce the size of the taxable estate, they also reduce the potential tax liability. For married couples, the benefit doubles because each spouse can gift the annual per donee exclusion amount to the same individual, and if the recipient has a spouse, then the donors can double the impact of their gifting again. Let’s review an example that demonstrates effective use of the annual per donee exclusion amount.

Assume that Mike and Carol recently met with their attorney who suggested that they start reducing the value of their taxable estate. The pending nuptials of their daughter, Cindy, caused Mike and Carol to be preoccupied. They realized that they better act quickly to utilize their 2022 annual per donee exclusion amounts. They decided to give each of their six now-married children, Greg, Marcia, Peter, Jan, Bobby, and Cindy an envelope containing $64,000 ($32,000 from each of Mike and Carol to each child, plus an additional $32,000 for each spouse of each child) at Cindy’s wedding on New Year’s Eve 2022. As the clock strikes midnight, the family rings in 2023, and Mike and Carol hand out another set of envelopes, this time, with $68,000 cash in each envelope.

In the example above, in just a few hours, Mike and Carol gave away nearly $800,000 without incurring any estate or gift tax consequences. Mike and Carol each gave $16,000 to each of their six children and their spouses, totaling $384,000 in 2022, and Mike and Carol each gave $17,000 to each of their six children and their spouses, totaling $408,000 in 2023, for a total of $792,000. In fact, Mike and Carol could each also gift $16,000 to a grandchild in 2022 and $17,000 to that same grandchild in 2023. The foregoing example demonstrates how quickly these gifts can add up and make a huge impact on an estate. In addition to using the annual exclusion gifts, the Code gives taxpayers a tax-free pass when they pay the medical bills of another individual or pay the tuition bills of a student. The Code imposes no limit on the amount of these medical and tuition gifts, as long as the amounts are paid directly to the provider. The Code also allows contributions to charitable exempt organizations. The Code imposes no limit on the amount of these contributions for gift tax purposes, which provides another easy option for those who want to do some easy estate planning. Such contributions may also qualify for an income tax deduction, up to certain percentages of the taxpayer’s adjusted gross income.

The upcoming holiday season presents the perfect time to consider these and other estate planning issues. Options may exist for use of the annual exclusion gifts in conjunction with trusts and a long-term estate plan. Giving now, rather than waiting until death provides several estate planning opportunities in the form of tax-free distributions, reduction of the gross estate, and appreciation outside of the taxable estate, not to mention the benefit to the recipient that the donor will witness while alive. I am always available to help you explore these opportunities and more to determine whether it makes sense for your family situation.