End-of-Year Check-In: Are Your Investments Aligned with Your Estate Plan?

As the year winds down, it’s the perfect time to reflect on your financial goals and ensure your investments and estate plan are working together seamlessly. If you’ve experienced significant financial or personal changes this year — or even if you haven’t — an end-of-year check-in can help you maximize tax benefits, avoid costly mistakes, and keep your legacy on track.

Here are a few key areas to review before the clock strikes midnight on December 31.

1. Review Your Beneficiary Designations

Beneficiary designations on accounts like 401(k)s, IRAs, and life insurance policies override what’s written in your will or trust. This means outdated designations can cause unintended consequences.

Example: Imagine you remarried but forgot to update the beneficiary on your IRA. If your ex-spouse is still listed, they’ll inherit the account — even if your estate plan says otherwise. Double-check that all beneficiary designations reflect your current wishes.

2. Maximize Tax-Advantaged Gifting

The end of the year is your last chance to take advantage of the annual gift tax exclusion for 2024, which allows you to gift up to $18,000 per recipient without incurring gift taxes.

Example: If you want to reduce the size of your taxable estate, you could gift $18,000 to each of your three children and their spouses. If you’re married, you and your spouse can combine your exclusions to gift $36,000 per person, transferring up to $216,000 out of your estate in one year.

3. Consider Charitable Giving

Donating appreciated assets or setting up a Donor-Advised Fund (DAF) can reduce your taxable income while supporting causes you care about.

Example: If you donate stock valued at $50,000 (originally purchased for $20,000) to a DAF, you avoid paying capital gains tax on the $30,000 appreciation and get a charitable deduction for the full $50,000, all while leaving a charitable legacy.

4. Align Your Investments with Your Estate Plan

Your estate plan and investment strategy should work hand-in-hand to protect and transfer your wealth efficiently. Consider whether your assets are properly titled and whether trusts could help reduce taxes or simplify transfers.

Example: If you’ve invested in rental properties, placing them in a revocable living trust can keep them out of probate, ensuring your heirs receive them quickly and efficiently.

Finish the Year Strong

A little year-end planning can go a long way toward securing your financial future and protecting your legacy. Whether you need to update beneficiary designations, make tax-savvy gifts, or ensure your investments align with your estate plan, taking action now can save you time, stress, and money later.

Contact us today to schedule your end-of-year estate planning review. Let’s make sure 2025 starts off right!

Gifting with Purpose: How to Make Tax-Efficient Gifts to Loved Ones This Holiday Season

The holiday season is a time of giving, and for many families, it’s also a great opportunity to think about how their gifts can do more than bring joy — they can create meaningful financial benefits for both the giver and the recipient. With thoughtful planning, you can make tax-efficient gifts that help your loved ones today while potentially reducing the size of your taxable estate. Here’s how.

Take Advantage of the Annual Gift Tax Exclusion

Every year, the IRS allows you to give a certain amount to as many people as you’d like without triggering gift taxes. For 2024, this annual gift tax exclusion amount is $18,000 per recipient. That means you could give $18,000 to each of your children, grandchildren, or friends — and if you’re married, your spouse can do the same, effectively doubling the exclusion to $36,000 per recipient.

Example: If you have two children and one grandchild, you and your spouse could gift a total of $108,000 this year without impacting your lifetime gift and estate tax exemption. It’s a win-win: your loved ones benefit from the funds now, and you reduce the size of your taxable estate.

Cover Educational or Medical Expenses Directly

Did you know that some gifts don’t count toward your annual exclusion at all? Payments made directly to an educational institution for tuition or to a healthcare provider for medical expenses are entirely tax-free and unlimited.

Example: If your grandchild is attending college, you could pay their tuition directly to the school without it counting against your $18,000 annual exclusion. Similarly, if a loved one has high medical bills, you could cover those costs directly to the provider.

Fund a 529 Plan for Future Education

If you’re thinking about the long-term future of a child or grandchild, contributing to a 529 college savings plan is an excellent option. These accounts grow tax-free as long as the funds are used for qualified education expenses. Better yet, you can front-load up to five years of annual gift exclusions at once.

Example: Let’s say you want to help a newborn grandchild get a head start on their education. In 2024, you could contribute $90,000 ($18,000 x 5 years) into their 529 plan, effectively making a large gift now while still staying within IRS guidelines. Your spouse could do the same, doubling the contribution to $180,000.

Plan Thoughtfully

Gifting can be a powerful way to share your wealth while reducing your tax burden, but it’s essential to do it strategically. If you’re considering making significant gifts this holiday season, consult with an estate planning attorney to ensure you’re maximizing the benefits.

This holiday season, let your gifts be more than thoughtful — let them be purposeful. 🎁

Year-End Financial Planning Checklist for Your Estate: Maximizing Deductions and Reducing Liabilities

As the year comes to a close, it’s an ideal time to review your estate plan to maximize tax efficiency and ensure that your financial goals are on track. From making strategic gifts to planning for retirement and education funding, these year-end actions can help you protect and grow your wealth for generations to come. Here’s a checklist to guide you through a productive year-end financial review with your estate planning team.

1. Plan Gifts with an Eye on Tax Efficiency

One of the simplest and most effective strategies for reducing estate taxes is through annual gifting. The IRS allows individuals to gift up to a certain amount per recipient each year without incurring gift tax. Meeting with your estate planning attorney before year-end can help you make the most of this annual exclusion. They’ll guide you on structuring gifts to loved ones, friends, or even charitable organizations, helping you reduce the taxable portion of your estate while benefiting those you care about.

2. Collaborate with a CPA for Tax-Saving Opportunities

If you own a closely-held business, consider meeting with a CPA to discuss any year-end tax elections or planning opportunities available to you. Your CPA can guide you through decisions like bonus depreciation, equipment deductions, or qualified business income (QBI) deductions that could positively impact both your personal and business taxes. Working together with your CPA and estate planning attorney can provide a comprehensive strategy to balance short-term tax savings with long-term estate planning goals.

3. Review Retirement Accounts for Strategic Contributions or Distributions

Year-end is a perfect time to assess your retirement accounts, including IRAs, 401(k)s, and pensions, with the help of your financial advisor. If you’re over 73, remember to take any required minimum distributions (RMDs) to avoid tax penalties. Alternatively, if you’re still building your retirement savings, maximizing contributions now can enhance your long-term financial security while providing tax benefits. Your advisor can also help assess the viability of Roth conversions or charitable rollovers if they align with your estate and income strategies.

4. Plan for Future Education and Large Expenses

If part of your estate plan includes providing for your children’s education or other large future expenses, year-end is an excellent time to evaluate and optimize funding strategies. Your financial advisor can help you explore tax-advantaged options like 529 plans or custodial accounts, ensuring your contributions align with both your estate and income planning goals. Additionally, if you anticipate major expenses, such as a wedding or home purchase for a child, your advisor can recommend investment vehicles or structured gifts to prepare financially.

5. Check Property Titling and Trust Funding

Make sure that any real estate, business interests, or other significant assets are properly titled and funded into your trust, if applicable. This ensures that your estate plan will function as intended, avoiding unnecessary probate and streamlining the transition of assets. Year-end is an ideal time to review any recent purchases or changes in your holdings with your estate planning attorney to confirm that all titles, deeds, and designations are up to date.

6. Review Your Estate Plan with Your Advisory Team

As part of your year-end review, consider setting up a meeting with your estate planning attorney, CPA, and financial advisor to discuss your goals for the coming year. Having all your advisors in sync can help identify additional opportunities to protect your wealth, reduce liabilities, and optimize tax savings. This proactive approach ensures your plan is as robust and effective as possible, aligning with any recent changes in tax laws or financial circumstances.

Taking Charge of Your Financial Future

By approaching your estate plan with this year-end checklist, you create an opportunity to protect your legacy and make smart financial choices for yourself and your family. From making tax-efficient gifts to preparing for retirement and education, each step strengthens your estate plan, helping you enter the new year with confidence and peace of mind.

Understanding the Tax Landscape in Comprehensive California Estate Planning

When crafting a comprehensive estate plan in California, understanding the different types of taxes at play is crucial. Each tax—federal estate and gift tax, income taxes on capital gains, and county property taxes—has unique implications, and strategies to minimize one may inadvertently increase exposure to another.

Federal Estate and Gift Tax:
The federal estate tax applies to the transfer of an individual’s assets at death, while the gift tax applies to transfers made during life. As of 2024, the federal estate and gift tax exemption is $13.61 million per individual, meaning estates valued below this threshold are not subject to federal estate tax. However, for some individuals and families, this tax can be significant, and strategies like gifting or creating trusts are often employed to minimize exposure.

Federal and State Income Taxes on Capital Gains:
Capital gains taxes are incurred when assets are sold for more than their purchase price. In California, both federal and state income taxes apply to these gains. When designing an estate plan, it’s essential to consider the potential capital gains tax implications, especially when transferring appreciated assets, as strategies that minimize estate tax might trigger substantial capital gains taxes.

County Property Tax:
California’s Proposition 13 generally caps property tax increases at 2% per year, based on the property’s assessed value at the time of purchase. However, transferring real estate, either during life or at death, can trigger a reassessment of the property’s value, potentially leading to a significant increase in property taxes. Certain exemptions exist, such as transfers between parents and children, but many of these exemptions have been limited by Proposition 19.

Navigating the Interplay of Taxes:
The key challenge in estate planning is that strategies to mitigate one type of tax can increase exposure to another. For example, gifting appreciated assets during life can reduce the taxable estate, but it also transfers the donor’s tax basis to the recipient, potentially increasing capital gains taxes when the asset is sold. Similarly, transferring real estate can avoid estate tax but might lead to a reassessment and higher property taxes.

Effective estate planning requires balancing these competing tax considerations while keeping the client’s overall goals in focus. A holistic approach, often involving careful timing of transfers and the use of specialized trusts, is essential to minimize the total tax burden and preserve wealth across generations.

By understanding and addressing the interaction between these taxes, estate planning can be tailored to meet clients’ needs and objectives, ensuring that their legacy is preserved with minimal tax exposure.

Legal Pitfalls of Adding an Adult Child to the Title of Your Home

Adding an adult child to the title of your home might seem like a straightforward way to simplify estate planning, avoid probate, or show generosity. However, this seemingly simple action can have significant legal and financial repercussions that many homeowners overlook. Before making this decision, it's essential to understand the potential pitfalls and consult with an experienced estate planning attorney.

1. Gift Tax Implications

When you add an adult child to the title of your home, you may unintentionally trigger gift tax consequences. The IRS views the addition of another person to your property's title as a gift. If the value of the interest in the property exceeds the annual gift tax exclusion (which is $18,000 as of 2024), you may need to file a gift tax return. While the gift tax itself might not be immediately payable due to the lifetime exclusion, this could reduce your available exemption for future gifts or your estate's exemption after your death.

2. Loss of Control/Exposure to Your Child’s Debts

Once your child is added to the title, you no longer have full control over the property. Decisions regarding the sale, refinancing, or mortgaging of the property will require your child's consent. This loss of control can lead to complications, especially if your relationship with your child changes or if your child encounters personal financial difficulties, such as divorce, bankruptcy, or other creditor issues. If your child encounters financial trouble, creditors may place liens on the property or force a sale to satisfy the debts. This could result in the loss of your home or the need to pay off your child's obligations to avoid foreclosure.

3. Capital Gains Tax Issues

When your child is added to the title of your home, they inherit your cost basis in the property. If your home has appreciated significantly in value, this could result in a substantial capital gains tax when the property is eventually sold. In contrast, if your child were to inherit the property after your death, they would receive a "step-up" in basis, potentially eliminating or greatly reducing any capital gains tax liability.

4. Property Tax Reassessment in California

In California, adding an adult child to the title of your home can trigger a reassessment of the property's value for property tax purposes. Proposition 13 limits annual increases in assessed value, but transferring property ownership can result in a reassessment at the current market value. This could significantly increase your property taxes, potentially making it financially burdensome to retain the home.

5. Complications in Estate Planning

Adding your child to the title of your home can complicate your broader estate plan. This action may unintentionally disinherit other heirs or create tension among family members. If you have multiple children, adding just one to the title could result in an unequal distribution of your assets, leading to potential legal challenges after your death.

While adding an adult child to the title of your home might seem like a convenient way to manage your assets, it’s crucial to consider the potential legal and financial ramifications. The unintended consequences could far outweigh the perceived benefits. Before making any changes to your property title, consult with an experienced estate planning attorney who can help you explore alternatives, such as creating a trust, that can achieve your goals without the associated risks. Proper planning can ensure that your intentions are honored while protecting your financial security and your family's future.

Upstream Gifting: Benefits and Pitfalls

Transferring appreciated assets to an older generation, such as parents, can be a strategic move to take advantage of the "step up" in basis at death, potentially saving significant capital gains taxes. However, while this strategy offers tax advantages, it also comes with risks and complexities that must be carefully considered.

Understanding the Step Up in Basis

When an individual inherits property, the tax basis of that property is "stepped up" to its fair market value at the decedent's date of death. This means that if the asset has appreciated over the years, the capital gains tax liability on the inherited asset is based on the value at the time of death, rather than the original purchase price. For example, if a parent purchased a property for $100,000, and it was worth $500,000 at their death, the new basis for the inheritor becomes $500,000. This can result in substantial tax savings for the heir when they eventually sell the asset.

The Strategy: Gifting Appreciated Assets to an Older Parent

The strategy involves transferring ownership of appreciated assets (such as real estate or stocks) to an older parent. Upon the parent's death, the asset would then be inherited back by the original owner or another heir, with the benefit of a stepped-up basis.

Potential Benefits

1. Tax Savings: The primary benefit is the potential elimination or significant reduction of capital gains taxes due to the stepped-up basis.

2. Estate Planning: This can be a useful tool in estate planning, especially when dealing with highly appreciated assets.

Potential Pitfalls

1. Loss of Control: Once the asset is transferred, the original owner no longer has control over it. The parent now legally owns the asset, and there is a risk they might sell it or bequeath it to someone else.

2. Health and Longevity Risks: If the parent lives much longer than anticipated, the strategy's benefits might be delayed, and the original owner could face unforeseen financial complications.

3. Medicaid Eligibility: Transferring assets to an older parent could affect their eligibility for Medicaid and other needs-based government benefits.

4. Gift Tax Implications: The transfer could trigger gift tax consequences if the value of the asset exceeds the annual gift tax exclusion or the lifetime gift tax exemption.

5. Potential Family Conflicts: Relying on the good faith of the parent to return the asset after their death can lead to family disputes, especially if the parent’s estate plan is not clear or if there are other heirs involved.

Ensuring a Smooth Process

To mitigate these risks, consider the following steps:

1. Legal Agreements: Draft legal documents that outline the intent of the transfer and the expected return of the asset upon the parent's death. While not foolproof, this can provide some level of assurance.

2. Trusts: Setting up a trust can help retain some control over the asset and provide clear instructions for its handling upon the parent’s death.

3. Clear Communication: Ensure all family members are aware of the plan to avoid misunderstandings and potential conflicts.

4. Professional Advice: Consult with an estate planning attorney and a tax advisor to navigate the legal and tax implications properly.

Transferring appreciated assets to an older generation to take advantage of a step up in basis can be an effective tax-saving strategy. However, the inherent risks and potential pitfalls necessitate careful planning, clear legal agreements, and trust in the older generation. By working closely with legal and financial professionals, you can ensure that this strategy aligns with your overall estate planning goals and minimizes potential complications.

Integrating Charitable Giving into Your Estate Planning

Charitable giving is a noble way to ensure your legacy lives on, impacting future generations and supporting causes close to your heart. When structuring your estate plan, there are several philanthropic vehicles to consider, each offering unique benefits and considerations. From bequests to sophisticated trusts and donor-advised funds, understanding these options can help tailor your charitable contributions to align with both your financial and altruistic goals. Here's how you can effectively incorporate charitable giving into your estate planning.

Key Charitable Vehicles in Estate Planning

1. Bequests: One of the simplest ways to make a charitable gift is through a bequest contained within your living trust. This method allows you to specify an amount of money, a percentage of your estate, or specific assets to be given to charity. Bequests are highly flexible, easy to arrange, and can significantly reduce the estate tax burden on your heirs.

2. Charitable Trusts: These are more complex instruments that provide valuable tax breaks and can be tailored to suit different goals:

• Charitable Remainder Trusts (CRTs) allow you to receive an income stream or allow your designated beneficiaries to receive an income stream for a period, after which the remaining assets go to your chosen charity.

• Charitable Lead Trusts (CLTs) provide an income stream to the charity for a set term, and thereafter, the remaining assets revert to you or pass to your heirs, potentially reducing or eliminating gift and estate taxes.

3. Donor-Advised Funds (DAFs): DAFs act as a charitable investment account. You contribute assets which immediately qualify for a tax deduction, and then recommend grants to charities over time. This vehicle is particularly useful for those who wish to remain actively involved in philanthropy without managing a private foundation.

4. Private Foundations: For those with substantial assets, starting a private foundation can be an effective but complex way to control charitable giving. Foundations can fund various charities, offer family members roles in its administration, and create a lasting institutional legacy. However, they require significant management and adhere to strict regulations.

5. Endowments: Setting up an endowment can provide a charity with a permanent source of income, as the principal is kept intact while investment income is used for charitable purposes. This option is appealing if you want to ensure long-term financial support for a charity.

Strategic Considerations for Charitable Giving

Tax Implications: Each vehicle has specific tax benefits and implications. For example, bequests can reduce the size of your taxable estate, while contributions to CRTs and CLTs may reduce both income and gift taxes. Understanding these nuances is crucial in maximizing the tax efficiency of your charitable efforts.

Timing of Impact: Some options, like direct bequests or contributions to DAFs, can provide immediate benefits to charities. Others, such as endowments or CLTs, are structured to give over a long period. Consider when you want your chosen charity to benefit from your gift.

Control and Legacy: Decide how much ongoing control or involvement you wish to have. DAFs and private foundations allow for continued involvement in donation decisions, whereas bequests and endowments are generally one-time arrangements.

Family Involvement: If involving family in philanthropy is important, consider vehicles that support this goal. DAFs and private foundations can engage multiple generations in charitable activities.

Charitable giving within estate planning is not just a way to reduce taxes—it's a strategy to make a meaningful difference in the world while honoring your values. Whether it’s supporting a local community, contributing to global causes, or advancing scientific research, the right charitable vehicles can integrate your philanthropic objectives seamlessly into your overall estate plan. As always, consulting with legal and financial professionals can provide guidance tailored to your personal circumstances, ensuring your charitable contributions are both impactful and aligned with your estate planning goals.

Are Holiday Gifts Taxable?

The short answer: Yup! But, spoiler: you probably won’t end up paying any gift taxes on holiday gifts.

A holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that the donee didn’t have to do or pay anything for it. It’s a true gift! It’s also a gift that you’re giving during life (intervivos) - as opposed to a gift that you make after you die (i.e. through a will or trust).

There is a tax that could be imposed, but that requires a little more explanation. Just like the government taxes things from your income (income taxes), to certain goods sold (sales tax), to real estate that you own (property taxes), it also taxes the transfer of items. So the gift tax is a transfer tax.

The gift tax is only imposed by the federal government (think: IRS); California doesn’t tax gifts. And it’s only imposed on the donor (the person giving the gift). If you receive a gift, and you live in California, you’re not on the hook for transfer taxes. If you give a gift, and you live in California, you still won’t owe any gift tax to the State of California and probably won’t owe any gift taxes to the federal government.

Here’s why: The federal government has this nifty rule called the “annual exclusion.” What that means is that each resident of the USA can make a gift up to $15,000, per year, to any other person, and not owe any taxes on that gift. In fact, the IRS doesn’t even want to know about it! You don’t have to report it. Married couples can combine that exclusion amount to $30,000 to one person, per year, and still fall within the same rule. So put another way, you’d have to be awfully generous this holiday season to have to deal with gift taxes.

Well, what if you are that generous?

If you make a gift in excess of $15,000 but less than what is called the exemption amount (currently $11.58 million per taxpayer for 2020; $11.7 million for 2021), you won’t owe any gift taxes. However, you do need to report it to the IRS. Once reported, the IRS will deduct the amount of the gift over $15,000 from your total exemption amount that you’re entitled to when you die. For example, if you give a $75,000 gift to your favorite niece this year, you would report a $60,000 gift ($75,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $60,000 from your $11.58 million unified credit. Only $11.52 million left to give before you pay transfer taxes! (The exemption amount involves estate taxes, which we can explain and discuss with you as part of your estate planning process.) 

Until then, may you have a safe, healthy, and generous holiday season!

Estate Planning for Noncitizen Spouses

Today, 44% of Californians were born out of the state. And the proportion of foreign-born residents (28%) is nearly double that of transplants from other states (16%). From an estate planning standpoint, the big-picture concepts hold true whether or not someone is born in California. Non-Californians own property just like Californians do. Similarly, most everyone has loved ones who they care for most, regardless of citizenship or residency.

However, tax treatment is different depending on one’s citizenship and residency. Complications arise when one or both spouses in a married couple are not U.S. citizens.

If you and/or your spouse are non-citizens of the United States, then two major concepts will play a role in your estate plan: 1) the Unlimited Marital Deduction; and 2) the Gift and Estate Tax Exemption.

1. Unlimited Marital Deduction
   Married citizen couples enjoy a tax benefit called the “unlimited marital deduction”. Citizen spouses can transfer property back and forth between each other⁠—lifetime gifts or transfers on death⁠—and it is never a taxable event. Non-citizen spouses do not get this benefit. If your spouse is not a U.S. citizen, and you give them a gift, then it is only tax-free up to $154,000 a year (in 2019). (This amount is indexed for inflation). For example, adding your non-citizen spouse onto the title of your family home could potentially become a taxable gift. Or upon the citizen spouse’s death, the non-citizen inherits all of the marital assets without the marital deduction. Thankfully, estate planners have techniques, like a Qualified Domestic Trust, to assist non-citizens avoid unnecessary taxable events.

2. Gift and Estate Tax Exemption
   Married couples who are both citizens, or if they are legal permanent residents (green card holders), are granted a unified gift and estate tax exemption. In plain terms, if citizens or green card holders transfer property in the amount of $11.4 million (in 2019) or less then no gift or estate taxes are owed. (This amount is also indexed for inflation). That amount includes all lifetime gifts with whatever you own at death. In large part, citizens do not need to worry about making transfers to their citizen spouses. However, non-citizens only receive a $60,000 exemption from the gift and estate tax. That’s not a typo. Leaving property to a non-citizen could result in a lot of estate taxes without proper planning. For more about the gift and estate tax, read our previous blog post.

Putting the above concepts to work, if spouses transfer property between each other, and the recipient spouse is a non-citizen, then the marital deduction is nonexistent, and the citizen spouse would have to employ their gift and estate tax exemption, if they have one, where they otherwise would not have to. Then later, if the non-citizen spouse passes property to any children, the non-citizen spouse would not have the gift and estate tax exemption a citizen spouse would have. The result could be an avoidable disaster.

Non-citizens largely have the same desires and wishes that citizens have. Their legal status is merely different than that of citizens. However, that legal distinction does create challenges for which a plan is necessary. Do not leave your loved ones with an undesired mess. Get ahead of the issues by planning now.

Are Holiday Gifts Subject to the Gift Tax?

The short answer: yup! But the more nuanced answer is that if you are giving a gift or receiving a gift in California, you probably won’t end up paying any gift taxes on holiday gifts.

Let’s take a look at the mechanics of a holiday gift. Without getting overly complicated, a holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that no one traded you or paid you anything for it (as in, it’s a true gift). Just like the government taxes your income (income taxes), certain goods sold (sales tax), and also real estate that you own (property taxes), it also taxes the donative transfer of assets. So the gift tax is a transfer tax.

A couple of details: the gift tax is only imposed by the federal government--so only the IRS will tax you, not the state of California--and it’s only imposed on the donor (the person giving the gift). If you receive a gift, and you live in California, you’re not on the hook for transfer taxes.

There are two types of gifts: those you give during life (intervivos) and those you make after you die (like through a will or trust). We’re going to focus on intervivos gifts since most holiday gifts are given during life.

Here’s why most of you will not owe any gift taxes on your holiday gifts. The federal government has this nifty rule called the “annual exclusion”. What that means is that each of you can make a gift up to $15,000, per year, per recipient, and not owe any taxes on that gift. In fact, the IRS doesn’t even want to know about it! You don’t have to report it. Married couples can combine that exclusion amount to $30,000 to one recipient, per year, and still fall within the same rule. So put another way, you’d have to be awfully generous this holiday season to have to deal with gift taxes.

Well, what if you are that generous? What happens if you make a gift that exceeds the annual exclusion?

Now we get to the “unified credit” or estate tax exemption amount. The unified credit is an amount the federal government allows you to gift during your entire lifetime, and combine that amount with whatever you own when you die, and not pay any transfer taxes if you are below the unified credit amount. It’s an amount set by law, and it increases every year based on inflation. The credit amount in the year that you die is what is applied. The exemption level for 2018 is $11.18 million. For example, let’s say you die in 2018 (sorry to bum you out!)--if the total of what you gifted during your life, and what you owned at death is less than $11.18 million then you would pay ZERO transfer taxes. For 2019, that number increases to $11.4 million.

Let’s recap: if you make a gift to someone that’s valued at $15,000 or less, per person, you don’t have to report it, and no transfer taxes are owed, and there’s no reduction in your unified credit amount. If you make a gift in excess of $15,000 but less than the unified credit (currently $11.18 million), you won’t owe any transfer taxes, but you’ll need to report it to the IRS. They’ll walk over to your file, and deduct the amount of the gift from your unified credit amount. For example, if you gift $20,000 to your favorite niece this year, you would report a $5,000 gift ($20,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $5,000 from your $11.18 million unified credit. Only $11.175 million left to give before you pay transfer taxes!

Happy Holidays! And don’t forget to send those ‘thank you’ cards!

Explaining the Gift and Estate Tax

The gift and estate tax are both transfer taxes. That means that they tax the transfer of assets from one person or entity to another. The amount of the tax is based on the value of the asset being transferred. For example, if I give you my 2007 Toyota Camry, then I am transferring an automobile from me to you. The value of that transfer would be the fair market value of the Camry when I transfer it. So we'd have to figure out how to value it (most likely look in Kelley Blue Book, or something similar) and the tax would be calculated based on that value, and I would owe any taxes generated on the transfer since I am the grantor (giver) of the gift. There are exemptions from paying the tax that I'll get into below. Also, this post only refers to federal transfer taxes. California does not impose state-level transfer taxes on gifts.

Let's first distinguish between the gift tax and the estate tax. I already told you that they're both transfer taxes. The gift tax is a tax on lifetime transfers. The estate tax--also affectionately called the "death tax" (they're the same thing)--refers to a tax on gifts through death (think: gifts made from wills or trusts; inheritances). So in my example above, about giving you my car, that would implicate the gift tax and not the estate tax. I gave it to you while I was alive.

If you make a lifetime gift, the grantor of the gift would owe the taxes. The same is true for death gifts. The estate of the person who made the gift would (typically) owe any estate taxes owed. (Some states have what is called an "inheritance tax" where the recipient also owes a tax, but California does not have an inheritance tax.)

Now that we've sorted out when each tax is implicated, let's figure out when you actually owe anything.

Both the gift tax and estate tax share a unified exemption amount. What that means in plain English is that you can transfer--either through life or death--a certain value of property, and you won't owe ANY transfer taxes. And that exemption amount is a whopping $11.18 million per person! That is not a typo. The latest tax law passed by Congress increased each person's exemption amount from $5 million to $10 million. And that amount is adjusted for inflation each year. That's how we got to $11.18 million. As of January 1, 2018, anyone making a gift may transfer up to $11.18 million worth of assets and pay zero taxes. The exemption amount is determined in the year you make the gift, or the year in which you died. That pretty much means that these transfer taxes do not apply to more than 99.98% of the population. If you're one of the lucky few who have more than that value in assets, then the transfer tax rate for the amount in excess is a flat 40%.

Please note that in 2026, this amount reverts back to the $5 million amount, and it will be adjusted for inflation to be somewhere around the $6 million mark per person.

A benefit that married couples get is that spouses can effectively combine their exemption amounts. So married couples can give away upwards of $22.36 million, and owe zero transfer taxes.

Wait, does this mean that I can cut a check for $1 million to my best friend, and I'll owe zero gift taxes? Yup, that's right. Except that I would need to let the IRS know that I made that gift by filing a gift tax return (Form 709). The IRS would then go over to my file and reduce my $11.18 million exemption by $1 million. Only $10.18 left to give away until I owe any transfer taxes!

Maybe some of you have heard that you are limited to a certain amount of gifts per year. What's that all about?

You're probably thinking of what's called the annual exclusion. The annual exclusion is an amount the IRS lets you gift in one single year, per recipient, and not have to file that gift tax return. If your gift is below the annual exclusion amount, then you don't have to tell the IRS about it. That amount is currently set at $15,000 per year, per recipient. Married couples may combine their gifts, so they effectively may make gifts up to $30,000 per year, per recipient and not have to file a gift tax return notifying the IRS.

So going back to my $1 million lifetime gift example, I would only notify the IRS of $985,000 of the gift since I get to use my annual exclusion on that gift to my best friend. If I'm married, I only need to tell them about $970,000 of the gift.

As you can see, transfer taxes are probably not going to be an issue for you. Actually, let me put it another way: if transfer taxes are a concern for you, we should hang out this weekend!