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  • Writer's pictureNicholas Pihl

Year End Gifts (non-charitable)

Updated: Dec 1, 2023

One situation I see fairly often is an aging grandparent making annual gifts to get money out of their taxable estate. This is a pretty simple and pain-free strategy to reduce your estate tax liability, while still retaining control of the bulk of your assets.

The annual exclusion lets you give $17,000 per person per person. That's not a typo. If you're single, you can gift $17,000 to each recipient. But if you're married, you and your spouse can each gift $17,000 to each recipient ($34,000 total).

But wait there's more. Let's say you're married and want to gift money to your daughter and her husband. You can give a total of $68,000 annually. How's that work?

You give your daughter $17,000

Your spouse gives your daughter $17,000

You give your daughter's husband $17,000

Your spouse gives your daughter's husband $17,000

Total = $17,000 + $17,000 + $17,000 + $17,000 = $68,000

You can gift this amount to the married couple each year. Which is nice. But it's not foolproof.

If they end up getting divorced, you've not only gifted money to your daughter, but given it to their future ex-spouse as well. Your child's ex-spouse is not entitled to the gifts you gave to your child (as long as these funds are kept separate). But they do get to keep whatever gifts you gave them directly.

Another snag is what they do with the money. By rights, it's theirs and you no longer can control what they do with it. If they want to spend it on fancy cars, gambling, or drugs, they can! They can even use it for a downpayment on an outragously expensive car, and then shackle themselves to high monthly payments on that vehicle. Rather than use this money to set themselves up for financial success, they're bleeding themselves dry, destroying their ability to save money, and becoming addicted to these annual gifts! That's the opposite of what you want.

Because of that possibility, it is important to have a discussion about what you intend for them to do with this money. You might work with them to set up investment accounts in their names, and then make the gifts directly into those accounts. This keeps the money from getting "lost" along the way. You might also have a rule in place that says, "we'll make these gifts annually, but we're going to check your accounts each year to make sure that yours are getting invested like we planned on." If the money has magically disappeared, no more gifts. All bets are off once you're gone, but hopefully they absorb some good financial habits between now and then. They might be amazed at how quickly money adds up when it is invested and left alone.

Some other noteworthy tidbits....

There's no limit on the number of recipients you can make gifts to. So even if you have 30 grandkids, you can make gifts to all of them, if you so choose. If you wanted to gift the maximum annual amount, and not have to file a gift tax return, you could gift a total of $510,000 per year ($17,000 x 30 grandkids). If they all have spouses, that becomes $1,020,000 that you can gift these couples. If you're married, you and your spouse combined could gift out $2,040,000 to these couples. Annually!

Here's an important detail if you're doing these gifts via check, though. The gift counts for the year in which the check is actually deposited, not the year written on the check. So even if the check says 12/25/2023, and you give it to them on that date, what matters is when they actually deposit it. If they wait until 1/5/2024 to deposit it, that's a 2024 gift, not a 2023 gift. As a result, you lose 2023's gift exclusion, which means you can give them $17,000 less than you could have otherwise.

Finally, if you want to get a large amount out of your estate, there's nothing saying you have to do so in annual increments of $17,000. You can file a federal gift tax form and exclude up to $12,920,000 of lifetime gifts (in addition to the annual exclusion limit). Notice that the $12,920,000 figure is your lifetime limit, not an annual figure. It is based on the total amount you give to all non-charitable recipients combined. This total is tracked on your gift tax return form. Deductible donations to charity don't count towards this number.

But it's not just the federal government that charges estate tax. Oregon's estate tax kicks in on estates worth $1,000,000 or more, and ranges from 10%-16%. But unlike the federal government which taxes gifts in excess of that $12,920,000 limit, Oregon only has estate taxes, it does not tax or keep track of gifts.

This presents an opportunity for estates in that $1,000,000 to $12,920,000 range, especially for people nearing the end of their life, who are willing to relinquish some control of their assets.

Suppose your own net worth falls somewhere in that range. If you wanted to avoid state and federal estate taxes, you can gift out everything above $1,000,000 (as long as it is below $12,920,000), and file a gift tax return stating how much of your federal exemption you've used up. You wouldn't owe any estate taxes to Oregon, nor to the federal government.

There's a risk worth mentioning here, though. This $12,920,000 limit is temporary and subject to change. In 2026, it will revert to somewhere between $5 million and 7 million. If you use up more than that amount for your lifetime gifts, and then die in 2026, you might see a surprise tax bill due to estate tax clawbacks on those gifts that exceeded $5-7 million. This is because lifetime gifts are added back to the value of your gross estate for your federal estate taxes. You wouldn't owe Oregon taxes in that scenario though as long as your estate is valued at less than $1,000,000.

Another downside is that if you maxed this strategy out for Oregon, you would retain control of only $1,000,000 of your assets, which might be risky, especially for retirees in good health who still need their nest egg for years to come. This makes it a poor fit for younger retirees in their sixties and seventies. But if you're over 90, have a terminal illness, or are experiencing rapid decline in health, it could be a fit.

One final caveat is that in some circumstances, this strategy might not be worth it overall. If you have investments that have grown substantially and gift those during your lifetime, your heirs will owe capital gains taxes when they sell those investments. If, however, you die with those investments in your possession, you get a "step-up" in basis to whatever the fair market value of those investments was at your death. It might be the case that the estate taxes you owe Oregon are smaller than the capital gains taxes that your heirs would pay upon liquidating your holdings. In that case, waiting to distribute your estate until you get the step up in basis would be more favorable. But it is a slightly complicated calculation that depends on their tax brackets, their timeline for liquidation, the expected growth rate of the assets, and the size of your estate.

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