When does it make sense to stay under gift tax limit?

[ScroogeMcDuck]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

EDIT: They asked for our advice on how best to gift it. Also, there's another 3-400k gift coming in about 5 years.

[toddthebod]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

[Weathering]

See if they would be willing to put some of the cash into US Treasury I-bonds. $10k each plus $10k each as gifts for the next 4 years. Result would be $100k in I-bonds that capture the current 9.62% and then keep up with inflation subsequently. Better than keeping it in cash.

Brainstorm: they could also buy each of you I-bond gifts for the next 5 years. Getting the total in I-bonds up to $200k.

[Californiastate]

I would be thankful for any gift at all. Suggesting to them that they give it to you quicker sounds off-putting.

[Lee_WSP]

Yes, spreading out the gift is preferable so long as the three hundred thousand isn’t needed immediately.

[Statistical]

Don't look a gift horse in the mouth. If I was giving my inlaws a $300k gift and they brought up it would be better given as a lump sum it would rub me the wrong way.

The reason for spread it out is to avoid reducing the estate tax exemption. Now for >95% of Americans this doesn't matter as gift or no gifts their estate will never be anywhere close to the exemption limit. However 95% of Americans can't just gift their inlaws $300k. The fact that they can means they have the wealth to potentially run into estate taxes and thus gifting over multiple years preserves more of their wealth. The $7M if they died today wouldn't go over the limit however depending on how long they live and how well their assets perform they certainly could be over the limit in the future.

[TomatoTomahto]

There are states with much lower estate tax limits. Look up theirs.

ETA: I gift my kids $32k annually each. If any of the 4 asked for a larger lump sum, I’d be making gifts to 3 kids.

[Katietsu]

It is their money. If they wanted it in something besides cash, they could do that without gifting it. I am pretty happy with the 10% of my net worth in cash this year.

[H-Town]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

If I were to gift 300k away and have them to put their nose into my finance and how I handle my tax planning, I would immediately retract the gift and say bye. But maybe it’s just me. OP, I would approach it with nothing but gratitude and no question asked. Keep my mouth shut and keep my nose away from people finance is a good way to avoid family drama.

[ScroogeMcDuck]

See if they would be willing to put some of the cash into US Treasury I-bonds. $10k each plus $10k each as gifts for the next 4 years. Result would be $100k in I-bonds that capture the current 9.62% and then keep up with inflation subsequently. Better than keeping it in cash.

Brainstorm: they could also buy each of you I-bond gifts for the next 5 years. Getting the total in I-bonds up to $200k.

Thank you, this is a good idea. They asked about this as well but we havent given it serious thought. Since we buy $10k each per year for ourselves they wouldn't be able to transfer the gifts to us until we stop.

[ScroogeMcDuck]

I would be thankful for any gift at all. Suggesting to them that they give it to you quicker sounds off-putting.

Sorry, I should've clarified they asked us if there's a better way to gift it to us. I'll update the OP.

[willthrill81]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

The sunset provision doesn't yet apply. There is no clawback provision if the couple exceeds the lifetime exemption via gifting.

In this situation, it seems very safe to not worry about staying under the $16k annual limit on reporting.

[ScroogeMcDuck]

There are states with much lower estate tax limits. Look up theirs.

ETA: I gift my kids $32k annually each. If any of the 4 asked for a larger lump sum, I’d be making gifts to 3 kids.

Good point, this is CA which I believe does not have estate tax.

They asked for our advice, have updated OP to note that. I did mention to spouse it feels gauche to discuss it with them!

[ScroogeMcDuck]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

Thank you. One thing I've never understood is why it's assumed the combined couple limit applies (approximately 6 million after sunset times two). Usually there's only one surviving spouse - what am I missing?

[TomatoTomahto]

There are states with much lower estate tax limits. Look up theirs.

ETA: I gift my kids $32k annually each. If any of the 4 asked for a larger lump sum, I’d be making gifts to 3 kids.

Good point, this is CA which I believe does not have estate tax.

They asked for our advice, have updated OP to note that. I did mention to spouse it feels gauche to discuss it with them!

Yeah, I wouldn’t have said it if I’d known.

Fwiw, of the 4 kids, there’s one whose advice I would take. Nothing wrong with the other 3, just not into financial matters. The one is also the same one who talked me out of putting some “fun money” into ARKK.

[TomatoTomahto]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

Thank you. One thing I've never understood is why it's assumed the combined couple limit applies (approximately 6 million after sunset times two). Usually there's only one surviving spouse - what am I missing?

Not an estate attorney, but what I think you’re missing is portability after the death of the first spouse.

[Jack FFR1846]

My state, Massachusetts has a $1M cliff. $999,999.99 and no tax. $1,000,000.01 and the entire million is taxed. I know we can't talk about future legislation, but ask yourself.....is there a tax California doesn't impose? I would not be at all surprised if CA implemented the MA taxes to bring in more money.

Things to consider: Medical bills for anyone can be paid by anyone else, and so long as it's paid to the medical biller, it does not count towards gifts. Also, college tuition.

[SuzBanyan]

My in-laws are considering gifting $300k to my spouse and me. To stay under the annual gift tax exclusion amount, they're planning to each gift each of us $16k, ie $64k total, per year for five years. This amount is currently in cash and it disturbs me to think of it sitting in cash for five years, not earning anything. Initially I thought they should just gift the $300k in a lump sum, file Form 709, and let it count against their lifetime exemption. However, if their total estate is about $7 million does spreading out the gift make more sense? We have no need to spend the $300k and would invest it according to our IPS.

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

The sunset provision doesn't yet apply. There is no clawback provision if the couple exceeds the lifetime exemption via gifting.

In this situation, it seems very safe to not worry about staying under the $16k annual limit on reporting.

The only way to take advantage of today’s higher limits is to die or gift in excess of the future exemption amount. If one spouse’s total gifts are over $6M (assuming that will be the new limit) but less than $12M (assuming that is the current per person limit) in 2022, then even if that spouse dies after the sunset, there is no clawback of the amount in excess of the then effective limit. For most people, the option to make gifts in excess of $6M is not particularly helpful.

In all likelihood, a $300,000 lifetime gift will reduce the balance available to transfer on death without paying estate taxes. Still, most people will not pay any federal estate tax even if such a gift is made.

[BernardShakey]

My state, Massachusetts has a $1M cliff. $999,999.99 and no tax. $1,000,000.01 and the entire million is taxed. I know we can't talk about future legislation, but ask yourself.....is there a tax California doesn't impose? I would not be at all surprised if CA implemented the MA taxes to bring in more money.

Things to consider: Medical bills for anyone can be paid by anyone else, and so long as it's paid to the medical biller, it does not count towards gifts. Also, college tuition.

No CA state tax on Social Security.

[TomatoTomahto]

My state, Massachusetts has a $1M cliff. $999,999.99 and no tax. $1,000,000.01 and the entire million is taxed. I know we can't talk about future legislation, but ask yourself.....is there a tax California doesn't impose? I would not be at all surprised if CA implemented the MA taxes to bring in more money.

Things to consider: Medical bills for anyone can be paid by anyone else, and so long as it's paid to the medical biller, it does not count towards gifts. Also, college tuition.

Oh, you’re being too harsh on our wonderful state; the cliff doesn’t apply to the first $40k of the estate

We gift 4 kids annually. The way I figure it, state estate tax (max of 16%) saved is $20,480 per year. Better in my kids’ pocket than the government.

[JazzTime]

I gifted my son $1MM in Apple stock a couple of years ago. I figured he and DIL could use the funds more than my wife and I. This gift also took those funds out of our estate and, as others pointed out, MA has a punitive estate tax. (It's not clear to me why the state essentially encourages its wealthier residents to leave. NH is looking better and better the older we get.) We also gift them $64K every year as well as fund the grandkid's 529 plans. We are fortunate to have the means to make these gifts.

As to advising OP's parents, if they have sufficient means I suggest they make larger gifts now while it may mean something. Funds are more useful to a 40 year old than to a 60 year old. And if there are grandkids, making gifts to the grandkids (either via 529 or otherwise) is another useful way to shrink the estate. As to advising the OP him/herself, once you have the funds, don't blow it! There may be an overwhelming temptation to "treat" oneself to something extravagant.

One other way OP's parents can spend down their estate is to treat the entire family to a luxury trip. Such an expenditure can provide wonderful family memories (assuming you don't end up fighting with each other). We've taken our son/DIL on a few luxury cruises that provided a great way to spend fun time together. We had them all to ourselves for a few weeks. Of course, that option ended with the arrival of the first grandkid - a different wonderful experience.

[cas]

The current estate tax exemption is set to sunset in 2025, so a married couples' limit will be approximately $12m instead of the current $24m. Depending on how old they are and how their investments do, they could easily exceed that amount.

Thank you. One thing I've never understood is why it's assumed the combined couple limit applies (approximately 6 million after sunset times two). Usually there's only one surviving spouse - what am I missing?

As TomatoTomahto mentioned, what you are missing is the concept called "portability" (of unused estate tax exemption after the death of the first spouse.) "Portability" is something that became possible only relatively recently ... 2010 maybe?

However, "electing" portability requires work on the executor's part after the death of the first spouse. (It doesn't happen automatically. Estate tax return Form 706 has to be filed even if no estate tax is owed). Given your parents' current net worth, it is a good thing to start having on your radar.

You may find this currently active thread interesting: Filing Federal Estate Tax Return to Get Portability

Note in particular the discussion on the value of estates where filing for portability becomes a good idea, and how many estates that should be filing for portability apparently are missing the opportunity. (Estates and Trusts attorney bsteiner chimes in on this topic, among others.)

[ScroogeMcDuck]

I wanted to thank everyone for their replies - I've read them all multiple times - and post an update. After another conversation with my in-laws, spreading out the gift makes sense. We assumed the exemption will revert to approximately $12 million. Given that they haven't received their inheritances yet and that their portfolio will continue to grow for several decades, they're likely to reach the exemption limit. It's really an amazing accomplishment. They're the classic millionaires next door who didn't come from money and worked hard and lived frugally. We also had a conversation about how they need to spend a lot more but habits are hard to change. My spouse and I put this year's gift into VTI/VXUS and don't plan to make any changes to our spending. However, we'll probably stop telling them not to buy so many Christmas gifts for our child.

[delamer]

I wanted to thank everyone for their replies - I've read them all multiple times - and post an update. After another conversation with my in-laws, spreading out the gift makes sense. We assumed the exemption will revert to approximately $12 million. Given that they haven't received their inheritances yet and that their portfolio will continue to grow for several decades, they're likely to reach the exemption limit. It's really an amazing accomplishment. They're the classic millionaires next door who didn't come from money and worked hard and lived frugally. We also had a conversation about how they need to spend a lot more but habits are hard to change. My spouse and I put this year's gift into VTI/VXUS and don't plan to make any changes to our spending. However, we'll probably stop telling them not to buy so many Christmas gifts for our child.

Keep in mind that they can invest the money in ETFs/mutual funds and transfer the shares in-kind to you. The money doesn’t have to stay in cash while they wait to gift it.

The downside is that you’ll acquire their cost basis at transfer.

[JackoC]

EDIT: They asked for our advice on how best to gift it. Also, there's another 3-400k gift coming in about 5 years.

Good edit, I guess in response to the inevitable scolding by those who just assume OP's are being nosy and out of line in their questions about relatives' financial decisions whereas I'd just assume the person had been asked for their advice unless they said otherwise.

The right basic answer is don't assume it won't cost you in estate tax later to go above the annual exclusion limit now unless the giver is fairly late in life with means very far below the limit (a common case, but not this one). These givers are not that far below the current law limit after 2025 and it's entirely possible it gets lowered further at some point (avoiding speculation/debate about future specific tax changes is fine, planning as if they can't happen, when avoiding the worst effects is fairly easy, unwise).

The other thing that might have been mentioned and I missed is (oh, just was! ) that if fully in tune with the givers, you can suggest some of the earmarked funds be invested in things closer to the risk/return in which you would invest them, but you don't expect the whole $300k if the return is negative. It could be at least in safe bonds of a little longer maturity than cash, albeit yield curve has gotten flat or even inverted depending on maturity. Although if that additional discussion is viewed as going over the line don't, you know that better with these particular people than disembodied voices on the internet (I never had Word 1 with my parents, 'millionaires next door', about gifts or bequest, so had to pay significant estate tax, threshold back then well under $1mil, and tax/estate guy had to improvise a plan where I renounced the inheritance and it went to my kids in trust. It would have been better for them to gift and figure a way to route the money to my kids when alive, but they weren't the kind of people who talk about that stuff, and I didn't give unsolicited advice as I already assume you wouldn't).

[ModifiedDuration]

You mentioned your child.

The grandparents could also Superfund their grandchild’s 529 Plan to the tune of $160,000 right now, if they so desired.

[8301]

If I can gift up to the annual exemption limit every year for the rest of my life, what is the downside of making occasional (much) larger gifts on top of the annual exemption limit? Is filing a form 709 an onerous task? This way, I will not "waste" any annual maximum exemption.

[Lee_WSP]

If I can gift up to the annual exemption limit every year for the rest of my life, what is the downside of making occasional (much) larger gifts on top of the annual exemption limit? Is filing a form 709 an onerous task? This way, I will not "waste" any annual maximum exemption.

It’s pretty annoying. It’ll take at least an hour out of your life the first time. I wouldn’t say it’s going to take significantly less the next time.

[delamer]

If I can gift up to the annual exemption limit every year for the rest of my life, what is the downside of making occasional (much) larger gifts on top of the annual exemption limit? Is filing a form 709 an onerous task? This way, I will not "waste" any annual maximum exemption.

One way to not “waste” your annual exemption is to expand the number of people to whom you gift.

[Katietsu]

See if they would be willing to put some of the cash into US Treasury I-bonds. $10k each plus $10k each as gifts for the next 4 years. Result would be $100k in I-bonds that capture the current 9.62% and then keep up with inflation subsequently. Better than keeping it in cash.

Brainstorm: they could also buy each of you I-bond gifts for the next 5 years. Getting the total in I-bonds up to $200k.

Thank you, this is a good idea. They asked about this as well but we havent given it serious thought. Since we buy $10k each per year for ourselves they wouldn't be able to transfer the gifts to us until we stop.

Could you not stop buying the i Bond for yourself immediately? Take your $20,000 and put it in VTI or wherever you wish you could put the gifted money.