As the end of the year approaches, there are a number of planning techniques that individuals can consider implementing before December 31, and after the first of the year, to take advantage of estate and gift tax savings opportunities.

Gifts to Individuals

Individuals may gift away a certain amount of assets to other individuals free of gift tax up to the annual exclusion limit. The 2018 limit on such gifts – $15,000 per donee per year – will apply in 2019 as well.  In addition, married couples will still be able to gift up to $30,000 to each donee.  It is important to remember that a donor is not limited to a certain number of annual exclusion gifts every year.  Making annual gifts to multiple beneficiaries enables individuals to transfer significant wealth over time.  The gift is considered to be made on the date the donee receives the gift.  Therefore, in the case of checks, the donee must cash the check before the end of the year for it to count towards 2018.  Since the gift tax annual exclusion is based on a calendar year, individuals also may wish to make 2019 gifts in early January.

Individuals interested in creating or adding to 529 Plan accounts for children or grandchildren should make the contributions before year-end and consider front-loading the accounts with five years’ worth of annual exclusion gifts.

Gifts to Charities

Gifts made to charities enjoy the dual benefits of reducing estate tax exposure and yielding current income tax deductions.  Such transfers must be effectuated on or before December 31 in order for donors to reap the tax benefit in 2019, when 2018 tax returns are filed and income tax is due to be paid.  It is important that donations be delivered to the charity before December 31, as the deduction is recognized on the date the charity receives the gift, not the date the check was written.

Maximization of Income Tax Savings with QCDs and RMDs

IRA owners must begin taking required minimum distributions (“RMDs”) after age 70½. These distributions are generally taxable income to the account owner.  It is possible, however, to reduce or eliminate such taxable income through use of qualified charitable distributions (“QCDs”).  A QCD is a direct transfer of funds from an IRA to a qualified charity.  When a QCD is made, the amount gifted to the charity is counted toward satisfying the IRA owner’s RMDs for the year but is excluded from his or her taxable income. Before QCDs became available to use, an individual traditionally would take a distribution from his or her IRA and then donate the amount of the distribution to charity. With this approach, the IRA distribution would be included in the individual’s income.  The individual would then claim an itemized charitable deduction for the amount of the distribution. However, under the new tax law, many people will not benefit from itemized deductions and therefore, with the traditional approach, will not be able to offset the additional income with a charitable deduction.

In contrast, the QCD strategy enables the IRA owner to reduce his or her income and resultant tax.  In addition, because adjusted gross income determines the taxation of Social Security Benefits, Medicare surcharges, and other tax deductions, credits, and benefits, use of QCDs can have significant ancillary tax advantages. It is important to note that QCDs are only available to IRA owners age 70½ and older.  In addition, private foundations and donor-advised funds do not count as qualified charitable organizations for purposes of QCDs.

Review of Estate Planning Documents

It is advisable for individuals to review Wills, Trusts and other estate planning documents periodically. The end or beginning of each year is a good time for this.  When reviewing estate plans, individuals should consider these questions:

  1. Do the provisions still accomplish your goals?
  2. Have your documents been updated to take advantage of changes to tax laws?
  3. Do your documents contain provisions that provide asset protection to your children, grandchildren and other loved ones?
  4. Are the fiduciaries named (Executor, Trustee, Power of Attorney/Agent, Health Care Agent) still appropriate?
  5. Are your Durable Power of Attorney and Living Will updated to your current wishes?
  6. Have estate planning concepts, funeral arrangements and decisions on anatomical gifts been discussed with family?
  7. Are your life insurance policy and retirement plan beneficiary designations still appropriate and in line with your overall estate plan?
  8. Are bank accounts and other assets titled in line with your overall estate plan?
  9. For business owners, are buy-sell agreements and the related valuations and life insurance policies up to date?