The Greenleaf Trust Gift Guide

The Infrastructure Investment and Jobs Act was passed by the House of Representatives on November 5 and signed into Law by President Biden on November 15, 2021. It’s approximately 2700 pages long and includes $1.2 trillion of spending into broad infrastructure improvements. The bill has bipartisan support. In fact, it passed the Senate by a vote of 69-30 on August 10. So what is the reason it’s been passed now? That’s more complicated but may have something to do with the Build Back Better Act. It was widely reported that the Infrastructure bill would not be passed without assurances and progress being made on the Build Back Better Act. That bill includes roughly $2 trillion in spending, and has had many iterations of proposed changes to gift, estate, and income tax rules in place today.

Considering that it’s December, and the holiday season has a lot of us in the giving mood, we thought it would be wise to look at giving from a charitable and wealth transfer perspective. The goal is that this will be a guide to help you decide whether or not you should give, as well as how to give efficiently, taking into consideration some possible changes to the tax landscape.

Do I Have All That I Need To Give While Still Maintaining My Financial Security?

All of the decision points for giving come after this one. If you can’t give and maintain the lifestyle you want, then don’t gift at that level. Analyze the gift based on the tax impact today, as well as in future years. Consider the income lost from giving away the asset, and the future appreciation from the asset. If you still have enough after giving it away, then you are in good position to move onto the next questions.

This sounds simple, and then tax law proposals and other issues muddy the waters. We wonder if the exemption amount, which is currently at $11.7M per person could decrease to $5M per person next year adjusted for inflation. If that happens, is our chance to take advantage of an increased gift and estate tax savings mechanism gone? The answer is yes, but more importantly, before asking how you can use the temporarily increased exemption and still maintain access to resources, ask yourself if you are willing to change your lifestyle if the gift doesn’t work as planned.

Why am I Giving?

Here is a sample of some of the best answers:

• I’m gifting to improve the lives of others.
• I’m creating a tool to teach finances within the family.
• While I’m here, I want to see them enjoy the money.
• I want to create a pot of money to preserve the family cottage.
• This will be the safety net for my children/grandchildren to give them a “step up” in life.

All are great answers, and there are many more. The “red flag” answer is, “It is the right tax reason.”

The Build Back Better Act has at times included a proposed expansion of the “Net Investment Income Tax.” The 3.8% tax applies to those with modified adjusted gross income of $400,000 for single tax payers and $500,000 for those that are married and filing jointly. In the past this was imposed on passive investment income, but the proposed changes would now expose distributions from S Corps to the 3.8% tax if included in the final legislation.

If the Net Investment Income Tax expansion passes, taxpayers at those income levels would be subject to a higher tax rate due to the proposed legislation. The higher the marginal tax rate, the more valuable the deduction. Does that mean people that aren’t charitably inclined should give to charities to offset the impact of higher taxes? What about a person that is charitably inclined, that considers giving next year, instead of this year, because they may get a larger deduction? The bottom line is don’t let the tax tail wag the dog in your decision making. The goal should be to consider the impact of taxes without having them be the primary driver of your decision.

What Should I Give?

If giving to transfer wealth is the goal, we look at the balance sheet and try to identify the asset with the greatest growth potential. As an example, if you transfer an asset with a $1M value and use $1M of your lifetime exemption, you haven’t saved any money from a gift and estate tax perspective if you pass away soon after the transfer. If that same asset appreciates to a $2M value after the transfer date, and would otherwise be includable in your estate when you pass away, you have “saved” that $1M from estate taxes.

While it was not included in the most recent Build Back Better Act proposals, the elimination of valuation discounts on transfers of certain entities that hold “nonbusiness assets” has made headlines in the last few months. These “nonbusiness assets” include cash, stocks, bonds and real property not used in an active trade or business. If enacted, entities such as family limited partnerships, would be valued as if the person gifting had transferred the asset directly for full fair market value. In that case, gifting $1M of ownership in the Family Limited Partnership will use up $1M of your lifetime exemption. Is that still the right answer if no discount is applied? That depends on what the partnership owns and how much it is expected to grow. Asking yourself these questions and giving equal weight to those answers can help a lot from a tax efficiency perspective.

Okay, this guide didn’t talk about the best places to find deals for your loved ones, or how to wrap the perfect present, still we hope it gave you a valuable starting point for the gifting discussion. Whether you are thinking about giving stock to your favorite charity, or business interests to your grandchildren, there should always be time to carefully evaluate your options. After all, it’s much nicer to give than to receive… as long as the gifting is done right.