Despite multiple proposals and countless legislative revisions, changes to everything from realizations of gains at death, lower federal transfer tax exemptions, raised estate tax rates and eliminating benefits of irrevocable grantor trusts, to name a few, have failed to become reality. However, that does not mean the proposals have disappeared for good, according to the article “Five Situations When Taxable Gifts Make Sense” from Wealth Management. In this environment, estate planning still needs to be done, although the tools to do so may be slightly different in case the tax laws change—or if they don’t.

Here are five different situations where making taxable gifts over the current $16,000 gift tax annual exclusion makes sense.

If you want to make a gift. You may want to make a gift, so a child can buy a home or start a business venture. Perhaps you want to bring a child into the ownership of a family business, or you simply want to share your wealth, more than the $16,000 exclusion. The federal gift tax exemption has never been this high, and the only tax downside might be the need to file a gift tax return.

What about the Step Up in Basis? The main reason not to make taxable gifts now is the step-up in income tax basis. Under current rules, assets transferred at death receive a step-up in income tax basis to the value at the time of death. Assets transferred by gift do not receive this benefit. If you wanted to give a $2 million property with a $100,000 tax basis, you will need to be prepared for the tax consequences.

Do you own rapidly appreciating assets? The main reason to make taxable gifts concerns appreciation. If your estate is well over the estate tax exemption, your heirs will save 40 cents for every dollar of appreciation, better in the hands of heirs rather than part of your estate. In this case, giving early makes all the difference. Business owners may give stock based on the growth they hope to achieve for a company.

Do you have a very large estate with high-basis assets and haven’t used your exemption? By all means, be generous! Under the current rules, even with no legislative changes, everything will be cut in half in 2026.

Are you sure your tax liability is going to increase in the future? Then making gifts today will help in the future.

Gifting can be a good way to spread income among family members, while avoiding having assets subject to a wealth tax. Gifting may also work to establish structures, like irrevocable grantor trusts or family limited partnerships, which might be more complicated in the future.

It is hard to say what the transfer tax rules will be five, fifteen, or fifty-five years from now. However, there are situations where making significant gifts makes sense. Remember, while the only sure things in life are death and taxes, tax laws do change.

Reference: Wealth Management (Feb. 2, 2022) “Five Situations When Taxable Gifts Make Sense”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys