Newly Proposed Gifting Rules May Affect Your Estate Plan
If you have never heard of the Federal “Greenbook,” you are not alone. We want to introduce you to this publication because its information could seriously affect your estate planning. The “Greenbook” is simply the nickname given to the Treasury Department’s yearly “General Explanations of the Administration’s Fiscal Year Revenue Proposals.” It explains the Administration’s (i.e.: President Obama’s) revenue proposals for the federal budget in fiscal year 2016. In the current Greenbook, we find several areas of estate planning that could be affected by the Administration’s budget proposals.
The entry that jumps out as easily understood and widely applicable is the proposed overhaul of annual gifting rules. Under current laws, a donor can make up to $14,000 in gifts to each donee without using any of the donor’s applicable (“lifetime”) exclusion for gift and estate tax purposes. Thus, as long as the gift is of a present interest, a donor could make a multitude of $14,000 gifts in one year without using any portion of his lifetime exclusion. In addition, the donor could start over in the next year, again gifting up to $14,000 to any number of donees, while still keeping the lifetime exclusion intact.
These types of gifts have often been made through Irrevocable Trusts in which the donor does not have to make an outright gift to the donee. When this is the case, the donor transfers property to a trust and gives the beneficiaries a “Crummey power” which must be presented to each donee to create a “withdrawal right” of the gift from the trust. The IRS is concerned about the use of Crummey powers and is seeking to limit them, claiming they are inappropriately used to avoid gift taxes by excluding a large value of contributions to trusts.
The newly presented Greenbook addresses the IRS’s concerns by creating an entirely new category of transfers eligible for the annual gift tax exclusion. Under the new rules, there would be an annual limit of $50,000 per donor on any transfers of property eligible for the gift tax exclusion. Thus, if total gifts were in excess of $50,000 within a single year, the excess amount would be taxable even if the gift to each individual donee remained under $14,000. The new rules would also apply to transfers into a trust, limiting gifts to the $50,000 annual cap, regardless of withdrawal rights that may be held by trust beneficiaries.
If you are in a position to make gifts, or have an Irrevocable Trust holding property for the benefit of minor children, you would be wise to consider these proposed changes and keep in mind their impact on your estate plan. Depending on your situation, a $50,000 annual per-donor limit on gifting could significantly change your taxable position. For a consultation regarding these changes and your estate plan, please call our office.
