By Steve Caltagirone MBA, CFP®
Partner and Client Advisor
As most clients of Mission Wealth know all too well, our current tax code is anything but simple and straight-forward. With every new tax bill coming out of Washington, D.C., we never seem to achieve the one goal that so many taxpayers seek: Greater simplicity! Unsurprisingly, the recent Tax Cuts and Jobs Act bill of 2017 kept the complexity factor alive and well.
Although the bill itself certainly offers its fair share of complexity, it also presents a tremendous opportunity that many high-net-worth households don’t fully understand. This opportunity surrounds an individual’s (or couple's) ability to transfer significant portions of wealth tax-free today vs. at death.
Many of our clients take advantage of the annual gift limits the IRS sets for each individual in this country. Simply put, in 2018 & 2019, an individual can gift up to $15,000 to any individual of his or her choosing. For families, this simply means that one child can receive up to $30,000 tax-free from the parents ($15,000 from Mom, $15,000 from Dad). The common misunderstanding across many households is that any amount above $15,000 is therefore taxable in accordance with our current gift tax rates. However, this is not the case!
In reality, an individual (or couple) can make gifts far beyond this annual limit and not worry about any tax whatsoever to either the benefactor or the recipient. This unique provision falls under the incredibly favorable terms of our estate tax exemption. With the recent tax bill of 2017, an individual currently enjoys an estate tax exemption of $11.2 million. For married couples that utilize the code’s “portability” allowance, this exemption jumps to $22.4 million.
Layered into this exemption, however, is a wonderful provision called the Lifetime Gifting exemption. This provision gives households the opportunity to utilize the estate tax exemption today via accelerated gifting well beyond the annual $15,000 limit mentioned earlier. Those that choose to make larger gifts today simply elect to start “using up” their estate exemption early. As an extreme example, a married couple in 2018 can elect to gift up to $22.4 million of assets 100% tax free. As long as the couple dutifully accounts for this election via required tax filing forms, they will not suffer the consequences of any gift tax whatsoever. Just the same, the recipient(s) of this gift will not be subject to any tax. In this example, the couple (and likely a CPA) will simply need to account for the fact that they will no longer have any estate exemption to utilize upon their passing.
At Mission Wealth, we routinely work with clients that are looking for unique ways to help provide more financial support to heirs today vs. the proverbial “from the grave.” Clients are often surprised to learn about the incredibly favorable marriage that exists between the estate and lifetime gift exemption. With many of our clients residing in high-cost housing communities along the West Coast, we find that this provision offers immediate tangible opportunities to help children “launch” in life with lower hurdles. Additionally, for many of our higher-net-worth clients, an argument can be made for the longer-term tax favor in migrating greater portions of wealth out of an estate today to lower the expected terminal estate value down the road.
How We Can Help
Through our comprehensive wealth management planning process, which includes close collaboration with your CPA and estate planning attorney, we can help determine the degree to which an accelerated gifting strategy may benefit you and your loved ones.