Tis the Season to Consider Gifting!
*By Anthony J. Enea, Esq. & Lauren C. Enea, Esq.
With the holidays fast approaching and the possibility that the current Federal Estate and Gift Tax exemption, will be reduced from $12,920,000 per person (for 2023) ($13,610,000 for 2024) 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 or to a Trust for their benefit is significantly higher. For high net worth individuals the potential loss of millions of dollars because of estate taxes is an important issue; especially if the opportunity to gift significant amounts is to expire in the near future. Thus, utilizing one’s exemption before January 1, 2026, should be explored. Additionally, if one’s estate is near the New York Estate Tax exemption of $6,580,000 for 2023, utilizing one’s federal gift tax exemption is a valuable tool in reducing the possibility of an onerous New York Estate Tax as well.
As to the issue of taxation of a gift, a donor can gift up to $17,000 per donee per year for the year 2023 ($18,000 per donee in 2024) free of any gift taxes. The donee/recipient of the gift is not taxed on the amount of the gift even if it is greater than $17,000. However, if the donor makes a gift in excess of $17,000 per donee this 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 $17,000 per donee in any calendar year. For example, a single (non-married) donor makes a gift of $100,000 in the year 2023 to his son or daughter, $17,000 of the gift is tax free and $83,000 would be subtracted from the donor’s federal exemption amount of $12.92 million dollars for Federal estate and gift taxes (available through 12/31/2023). If the donor is married, their spouse can join in on the gift and then reduce the taxable amount of the gift to $66,000, and only $17,000 would be subtracted from the lifetime exemption for each donor. It should be noted that New York does not have a gift tax.
The existence of a large 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 subject 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 2024 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. The trust can also be for the lifetime of the beneficiary. Furthermore, if the creator of the Trust wishes to do so, they can be responsible for the payment of any income taxes on the interest and dividends the trust assets generate, thereby creating another mechanism to get assets out of the name of the Trust creator for tax purposes.
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!
* Anthony J. Enea is the managing attorney of Enea, Scanlan and Sirignano, LLP of White Plains, New York. He focuses his practice on Wills, Trusts, 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.
*Lauren C. Enea, Esq. is a Senior Associate at Enea, Scanlan & Sirignano, LLP. She concentrates her practice on Wills, Trusts and Estates, Medicaid Planning, Special Needs Planning and Probate/Estate Administration. She believes that it is never too early or too late to start planning for your future and she enjoys working with individuals to ensure that their plan best suits their needs. Ms. Enea received a B.S. in Business Management from Quinnipiac University graduating Magna Cum Laude and a J.D. from the Pace University School of Law graduating Summa Cum Laude. She is admitted to practice law in New York and Florida. She can be contacted at 914-200-1476 or www.esslawfirm.com.