As individuals approach the later stages of their lives, effective estate planning becomes crucial. One mode of estate planning is generational gifting, which allows individuals to transfer wealth to their heirs during their lifetime rather than waiting until their passing. This approach not only helps reduce potential estate tax liabilities, especially in New York, but also often strengthens family bonds and provides immediate financial support to loved ones.
Gifting can be done in a number of ways: outright gifts, gifts in trusts, or even paying for expenses (such as medical and/or educational) expenses for a loved one directly, which is often considered when gifting assets to college-age grandchildren.
- Wealth Preservation: If your primary goal is to preserve the family’s wealth and assets for future generations, generational gifting can help meet these goals. The decision of which assets to gift raises various questions: which assets have the greatest potential to appreciate, what is the cost-basis of the asset being gifted and who is receiving the gifted asset? It is also important to time these gifts effectively. In New York and Federally, gifts made within three (3) years of death are “clawed-back” into one’s estate when a decedent’s estate is valued for estate tax calculation purposes. One of the important aspects of gifting to understand is that by gifting assets you are reducing the taxable size of your estate by both the current value of the asset gifted and its future appreciation.
- Use of Trusts: Outright gifts of assets can be scary. No one wants to “give up control” over their hard-earned savings, and it is hard to know if the recipient of the gifted monies will use those funds (or preserve them) the same way you have throughout your life. Trusts are excellent vehicles to allow for lifetime gifts to be made to individuals who may not be old enough, mature enough, or able to handle assets appropriately. The individual making the gift and creating the trust (known as the Grantor) is able to benefit the beneficiary of the trust and appoint a trustee (who should always be someone they trust) to handle the monies for the beneficiaries benefit and in accordance with the trust terms, which can be customized by the Grantor of the trust to determine how the Trust funds can be used.
- Estate and Gift Tax Exemption Considerations: As of 2024, the Federal Estate and Gift Tax Credit (also known as the Unified Credit) is set at $13.61 Million per individual and $27.2 Million for a married couple. This exemption “sunsets” on December 31, 2025 unless Congressional action is taken. If not, the exemption amount is likely to be reduced by 50% in 2026. As such, individuals with very large estates may wish to consider making large gifts of assets now in order to utilize the exemption amount that may no longer be available in the future. In essence, because the exemption could be reduced to approximately $7 Millon per person in the future, utilizing the existing bonus amount of $6.61 Million may be advisable. These gifting determinations should be coordinated with Estate and Tax Planning Counsel and your accountant.
As of 2024, the New York Estate Tax Exemption is currently $6.94 Million per person. While New York does not have a gift tax, the estate tax is very onerous and requires pre-planning in order for a married couple to ensure that they are able to take advantage of each of their exemptions upon the first spouse to die, otherwise it could be lost upon the first spouse’s passing. New York’s estate tax also includes a gradual rate structure, which can be particularly punitive for larger estates.
- Annual Gift Tax Exclusion: The Federal annual gift tax exclusion for 2024 allows individuals to gift up to $18,000 per recipient without incurring any gift tax or using any part of their Unified Credit. Couples can combine their exclusions to gift up to $36,000 per recipient, which is a powerful tool for reducing the size of an estate over time, without using any portion of the Unified Credit.
Generational gifting is an effective estate planning strategy that offers numerous benefits. By taking advantage of current gift and estate tax exemptions, individuals can ensure that their wealth is transferred to the next generation in a manner that is both financially effective and emotionally rewarding. Consulting with an estate and tax planning attorney can help navigate the complexities of both the Federal and New York estate tax laws and create a personalized plan that aligns with your goals.
