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Gifting Strategies in Florida [An Important Estate Planning Consideration]

Gifting Strategies in Florida

We’ve all heard “it’s better to give than to receive.” And, philosophically speaking, that’s probably true.  The satisfaction that comes with doing a good deed for a fellow human being is more valuable than an iTunes gift card or freshly baked Key-lime pie.  However, when the topic of conversation is the federal tax code, it’s often better to be the receiver than the giver. However, if you’re the giver, there are some gifting strategies in Florida to consider that could have a major impact on your estate planning.

The Gift Tax and Gifting Strategies in Florida

The recipient of a gift – even cold, hard cash – rarely owes any taxes for the gift itself because a gift is not “income” under the tax code.  On the other hand, the giver may owe taxes on the transfer under certain circumstances.  Not because the IRS wants to discourage gift-giving, but because extensive late-in-life gifts were historically used as a means of avoiding estate taxes.  Fortunately, though, the IRS is only concerned with large transfers, so you shouldn’t have to worry about any gift-tax liability for the twenty-dollar bill you tucked into your nephew’s birthday card. It is these larger transfers that relate directly to adopting certain gifting strategies in Florida or wherever you are.

What is the Gift Tax?

The “gift tax” is a federal tax on large transfers of money or valuable property for no or insufficient consideration.  In this sense, the gift tax is akin to the Federal inheritance tax in Florida except it pertains to lifetime transfers vs. wealth transfers upon death in Florida. With rates ranging from 18 to 40%, the gift tax prevents estate-tax avoidance by taxing transfers of wealth which might otherwise have been included within the taxpayer’s taxable estate.  Importantly, gift taxes are the obligation of the giver (not the recipient), but large annual exclusions and lifetime exemptions preclude tax liability for all but the largest gifts. For purposes of gifting strategies in Florida, we are only concerned with the Federal and not a state gift tax law.

Gift Tax Annual Exclusion and Lifetime Exemption

The Federal gift tax’s annual exclusion, set at $15,000 for 2019, is essentially the total yearly value that any single taxpayer can gift to any other individual without triggering the gift tax.  It applies per recipient, so you can give multiple gifts to numerous different people without paying gift taxes, as long as no single beneficiary receives more than $15,000 in value.  The annual exclusion resets for each tax year, so you can give someone $15,000 in 2019 and $15,000 more in 2020 (assuming the exclusion stays the same) without owing any gift tax.  And spouses each receive their own annual exclusion, allowing a married couple to gift assets worth up to $30,000 to each of their children (or any other recipient of their choice) without triggering the gift tax.  Spouses can also elect to “split gifts,” where any gifts made by either are deemed to have been given one-half by each.

Because of the lifetime exemption, gifts that exceed the annual exclusion do not necessarily require an actual payment to the IRS.  The lifetime exemption, which is linked to the estate tax exemption and currently stands at $11.4 million, allows a taxpayer to exempt from gift and estate taxes assets gifted over the course of his or her lifetime up to the amount of the exemption.  The way it works is that any gift amount over the annual exclusion triggers the gift tax.  The taxpayer then chooses to either pay the gift tax on the overage in the current tax year or apply the gift toward the lifetime exemption.  In the latter case, the taxpayer’s eventual estate tax exemption is reduced by the amount of any gift tax exemptions used throughout the taxpayer’s entire life.

As an example of gifting strategies in Florida, let’s say you give $50,000 each to your two children.  After applying the $15,000 annual exclusion as to each child, you are left with $70,000 in gifts subject to the tax.  But, instead of paying gift taxes on the $70,000, you decide to apply it toward your lifetime exemption, thereby avoiding any current tax liability.  Then, upon your passing, the estate-tax exemption available to your estate is reduced by $70,000.

Filing a Gift Tax Return in Florida

The IRS keeps track of the total gift-tax exemptions used by each taxpayer by requiring a Form 709 gift-tax return for each year during which a gift is given in excess of the annual exclusion.  That is, whenever a taxpayer gives to another person assets worth more than $15,000 (as of 2019) in a single year, the taxpayer must notify the IRS of the transfer by filing a gift-tax return.  Among other things, the return identifies and describes the gifted property by value and recipient, states the amount of the lifetime exemption which the giver wishes to claim, and includes any documentation necessary to substantiate the information in the return.  A return must be filed even if the value is entirely covered by the lifetime exemption and no gift tax is owed.

Non-cash gifts are assessed according to the asset’s fair market value, defined by IRS regulations as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”  For property with an active trading market such as stocks and bonds, the fair market value is the mean selling price quoted on the valuation date.  Vehicles and other property listed in a commercial publication can be valued according to published prices.  Property with no easily identifiable market, like antiques or jewelry, usually requires a recent appraisal to calculate fair market value.

What Qualifies as a Gift for Tax Purposes

According to the Roman philosopher Seneca, “a gift consists not in what is done or given, but in the intention of the giver or doer.”  The IRS disagrees – at least when it comes to the gift tax.  Per IRS regulations, a giver’s intent to make a gift is “not an essential element in the application of the gift tax to the transfer.”  So, whether or not you think you are gifting property is unimportant – what matters is the consideration, if any, provided in return.  Of course, the tax code is notoriously complicated, so not everything that looks like a gift counts as a gift.  And some things that don’t look like gifts actually are.

Thankfully, there are a few fairly concrete rules applying to transfers potentially implicating the gift tax.  Transfers between spouses, for instance, neither trigger the gift tax, nor count against the lifetime exemption.  Likewise, donations to organizations qualified under I.R.C. §501(c) – like qualified nonprofits and charities – and political organizations are not “gifts.”  After all, federal tax policy expressly encourages charitable giving through tax deductions.  Imposing gift taxes on charitable contributions or charitable trusts in Florida would be counter-productive.

Funds paid for another person’s education may be exempt, depending on how the assistance is provided.  Money gifted to the student, including through 529 plan contributions, for the student’s use in paying education expenses generally counts as a “gift.”  But tuition payments made directly to a qualifying educational institution on the student’s behalf are not subject to gift taxes.  Along the same lines, paying for someone else’s medical expenses can be exempt if the money is provided directly to the healthcare provider for “medical care,” as defined by I.R.C. §213(d).

A loan to a friend or family member can sometimes be deemed a “gift” if no interest is charged and/or the repayment terms are overly generous.  Likewise, forgiveness of an existing debt can qualify as a “gift.”  And many taxpayers are surprised to learn that adding another person’s name to an existing bank account can amount to a gift if the individual added to the account is permitted unrestricted access to the funds.

Gifting Strategies in Florida Estate Planning

Creative Gifting in Florida Estate Planning

The most obvious way to use gifting strategies in Florida, or more specifically, to take advantage of the gift-tax rules in Florida estate planning, is to give assets up to the amount of the annual exclusion to each person who will eventually be a beneficiary of your estate.  Every $15,000 transferred tax-free is removed from the future taxable estate, along with any growth accruing on the transferred funds prior to death.

Irrevocable trusts in Florida are also useful in reducing estate-tax liability.  Upon transferring assets to an irrevocable trust, you give up the power to exercise control over the assets, so assets in the trust are removed from your future taxable estate.  However, a transfer to a trust normally isn’t eligible for the gift tax’s annual exclusion because the beneficiary does not receive a “present interest” in the transferred assets.  Clever estate-planning attorneys have developed a strategy to get around this dilemma through what is known as a Crummey Trust.  Crummey trusts permit beneficiaries a limited window to access the transferred assets, allowing the transfer to qualify for the annual gift-tax exclusion.  As with outright gifts, even contributions to a Crummey trust exceeding $15,000 can reduce estate-tax liability by avoiding estate taxes on the growth accruing between the transfer and the grantor’s death.

A similar strategy is to create an ILIT (irrevocable life insurance trust) to own a permanent life insurance policy.  Transfers to the trust in the amount of the annual exclusion are then used to pay premiums.  Upon death, the life insurance company pays the policy’s death benefits into the trust, and the trustee distributes the proceeds according to directions laid out by the grantor in the declaration of trust.

Another creative estate-planning strategy is to form a multi-member LLC to own family assets in Florida.  Family members hold membership interests in the LLC (the equivalent of shares in a corporation), but the older generation retains all rights to manage the LLC.  Then, gifts to heirs are made in the form of membership interests in the company, rather than the assets themselves.  Because minority interests without management rights are considered to have a reduced market value, the interests transferred to the heirs are discounted by up to forty percent. And the annual gift-tax exclusion is calculated based on the discounted valuation.  Thus, a membership interest nominally worth $20,000 might only have a $12,000 fair market value after discounting.  By maximizing the value of the annual exclusion, the multi-member LLC strategy removes up to forty percent more value from the eventual taxable estate than what could be accomplished through outright gifts.

Under the right circumstances, strategic gifts can help to reduce future estate taxes and ensure your assets end up benefitting the people you care about most.  So, if minimizing tax liability is an important goal of your estate plan, it may be better to give than to receive after all.  An experienced Florida estate-planning attorney can help you decide whether strategic gifting is appropriate for your estate plan.

Steve Gibbs, Esq.

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