With the holidays fast approaching and the possibility that the current Federal Estate and Gift Tax exemption, being reduced from $12,060,000 per person (for 2022) to approximately $6,000,000 as of January 2026, the importance of deciding whether to make significant monetary and/or property gifts to one”™s children, grandchildren and other loved ones is significantly higher. For high-net-worth individuals the potential loss of millions of dollars of the gift and estate tax exemption is an important issue; especially if the size of the gift could result in the payment of a gift tax. Additionally, the recent drop in the value of one”™s stocks and other assets creates and opportunity to give away potential appreciated assets at a time they are of lower value. Thus, reducing the amount of one”™s exemptions that needs to be used.
As to the issue of taxation of a gift, a donor can gift up to $16,000 per donee per year for the year 2022 free of any gift taxes. This amount increases to $17,000 per donee per year in 2023. The donee/recipient of the gift is not taxed on the amount of the gift even if it is greater than $16,000. However, if the donor makes a gift in excess of $16,000 per donee in any calendar year, he or she is required to file a gift tax return by April 15th of the following year.
The filing of a federal gift tax return does not mean that the donor will have to pay any gift taxes as they will be able to apply their federal exemption for federal estate and gift taxes to the amount of any gift above the $16,000 per donee in any calendar year. For example, a single (non-married) donor makes a gift of $100,000 in the year 2022 to his son or daughter, $16,000 of the gift is tax free and $84,000 would be subtracted from the donor”™s federal exemption amount of $12.06 million dollars for Federal estate and gift taxes (available through 12/31/2022). The federal exemption increases to $12,920,000 in 2023. If the donor is married, their spouse can join in on the gift and then reduce the taxable amount of the gift to $68,000, and only $32,000 would be subtracted from the life time exemption for each donor. It should be noted that New York does not have a gift tax.
The existence of the largest (approximately Twelve Million Dollar) Federal estate and gift tax exemption, which expires on 12/31/2025 unless made permanent by law, creates a great opportunity for individuals to remove highly appreciating assets from their taxable estate. It is also a great way of reducing the assets one owns which may be subjected to one”™s long-term care costs, because the above stated exemption expires/sunsets as above stated, many affluent individuals are using the current exemption and the 2023 exemption to make significant gifts. They are also taking advantage of the Internal Revenue Service previously stating that they will not claw back into one”™s taxable estate any gifts made before the exemption changes, if it is later reduced.
The other issue that needs to be addressed by the donor is whether he or she wants the gift to the donee to be an outright gift that is free of any trust. This is a decision that often requires consideration of a number of factors such as the age of the donee (child or adult), the ability of the donee to appropriately manage his or her financial affairs and whether or not the donee is financially responsible.
The creation of an Irrevocable trust for the beneficiary is a prudent way of gifting and managing assets for a loved one. The trustee of the trust can be given the discretion to use the assets and income of the trust to or for the benefit of the trust beneficiary as delineated in the Trust. The trust can also specify the age the trust beneficiary is to receive the trust assets outright, and the trust can also have more than one beneficiary.
Additionally, the assets transferred to the Irrevocable trust will be protected against any claims the beneficiary(ies) could have against them until the time the trust makes a distribution to them outright. Additionally, one can give the trustee(s) the authority to continue the trust beyond the set termination date if doing so is in the best interest of the beneficiary. The assets in the trust will also not be subject to equitable distribution claims in New York in the event the beneficiary gets divorced. Furthermore, if the beneficiary develops any disabilities during the term of the trust and the beneficiary needs any federal and/or state aid, a properly drafted trust will allow the beneficiary(ies) share to be continued as a Special Needs Trust for the beneficiary, which will not impact their eligibility for any Federal and/or State programs.
In conclusion, unless one is making a relatively small gift to a donee and there are no concerns as to the donee squandering or wasting said monies, an outright gift may not be appropriate. In most instances the use of a trust to hold the gift is a much wiser option. Even the three wise men would have approved of it!
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* Anthony J. Enea is a member of Enea, Scanlan and Sirignano, LLP of White Plains, New York. He focuses his practice on Wills, Trusts and Estates and Elder Law. Anthony is the Past Chair of the Elder Law and Special Needs Section of the New York State Bar Association (NYSBA), and is the past Chair of the 50+ Section of the NYSBA. He is a Past President and Founding member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). Anthony is also the Immediate Past President of the Westchester County Bar Foundation and a Past President of the Westchester County Bar Association. He can be reached at (914) 948-1500 or at www.esslawfirm.com
