MSU Extension: Gifting a Living Legacy

This is a series of articles focusing on estate and legacy planning. Authors are Kaleena Miller, Madison-Jefferson County Extension Agent, kaleena.miller1@montana.edu and Marsha Goetting, MSU Extension Family Economics Specialist, goetting@montana.edu.

Take a moment during this busy holiday season to think about estate planning from a “gifting while you are alive” perspective. Some Montanans have stated they have received the greatest satisfaction when they gift some assets before they pass on so they can watch their children and grandchildren enjoy the benefits. As one Grandparent shared during one of my estate planning meetings, “Providing the down-payment on a home for my granddaughter and her family brought joy to all of us,” said Marsha Goetting, MSU Extension Family Economics Specialist.

In addition to expressing love and affection, gifts can provide children or grandchildren an opportunity to participate in the management of a family business or help finance further their education. Thus, gifts can become living legacies. “ The types of property that can be gifted include almost any item with a monetary value such as: real estate, stocks, bonds, mutual funds, certificates of deposit, U. S. savings bonds, cars, trucks, livestock, and everyone’s favorite, of course, cash,” said Kaleena Miller, Madison-Jefferson County Extension Agent.

Giving away property may sound simple at first, but federal gift tax laws should be followed to avoid potential problems later. While Montana does not have gift tax, the federal government levies a gift tax upon transfers of real and/or personal property made during life if the person making the gift does not receive something of similar value in exchange. For example, if a father gives his son land with a market value of a million the father has made a million-dollar gift. If the father sells the same land to his son for $1,000, he has made a gift of $999,000; the difference between the market value ($1,000,000) and the value received ($1,000).

During 2022, federal law allows an annual exclusion of up to $16,000 on gifts to persons without payment of the federal gift tax, said Goetting. Thus, you may give up to $16,000 in value of assets a year to as many people as you desire. The recipients do not have to be family members. No gift tax return (IRS Form 709) needs to be filed. Federal law also allows cumulative values of gifts in excess of the annual exclusion ($16,000) up to $12.06 million in 2022. “The amount is indexed annually for inflation so will change in 2023 to $12.90 million,” said Goetting.

As an example, assume Mildred gifts acreage in the Boulder Valley before the end of 2022 with a fair market value of $4 million and a cash gift of $16,000 to her daughter.

Mildred’s annual exclusion for the gift is $16,000 so her accountant would file a gift tax return reporting the remaining $4 million. Mom has used $4 million of her lifetime exclusion of $12.06 million. She has $8.06 million of her exemption remaining for further gifting. Or, Mildred can leave an estate valued at $8.06 million at death in 2022 there would be no federal estate tax due.

Keep in mind the federal gift and estate taxes are “unified,” meaning you can die with an estate of $12.06 million during 2022 or gift the same amount during your lifetime. The amount changes each year with the inflation indexing. The daughter is not required to declare the gift amount ($2,016,000) as income. The daughter, however, must pay state and federal income tax on any income produced by the property after the date of the gift. For example, if the daughter had deposited the $16,000 in a savings account and earned $180, she is must declare $180 for state and federal income taxes purposes.

During one of my estate planning meetings in eastern Montana, a Grandmother shared this story. She had gifted $16,000 to her adult granddaughter. The granddaughter used the $16,000 in the following ways. She placed $4,500 in her Montana Medical Care Savings Account (MSA), $4,500 in her husband’s MSA, and $7,000 in her IRA because she was age 50 or older.

The granddaughter wrote an appreciative thank you note to her grandmother, and included this statement, “We saved $606 in Montana income taxes and$2,240 in federal income taxes as a result of how I utilized your gift of $16,000.” Wouldn’t you say this grandmother has one very financially astute granddaughter? Do you think the grandmother will continue her living legacy next year?

More information about saving income taxes on Montana Medical Care Savings Accounts is available in an MSU Extension MontGuide which is online https://store.msuextension.org/publications/FamilyFinancialManagement/MT199817HR.pdf.

For those who do not have computer access, copies are available from the Madison-Jefferson County Extension office at 287-3282.