Lower Stock Prices’ Silver Lining: Good Time to Gift Assets

The recent stock market volatility due to the coronavirus has understandably caused concern. When the market drops, however, it presents a great estate planning opportunity. Then, it’s the perfect time to gift assets to loved ones at a significant discount, something that would not have been possible even one month ago.

Lower stock prices allow you to maximize the number of shares you give, enabling you to avoid federal gift taxes. Simply put, if your XYZ stock dropped by half thanks to recent events, you can now gift twice the number of shares that you could have just a few weeks ago at the same gift tax cost. If the value of your other investments has also dropped due to the crisis, the same opportunity would apply.

How much can you give?

Under federal law, you can make gifts of up to $15,000 each year to as many people as you want without reporting it or paying any gift tax. This is referred to your “annual gift tax exclusion”. Married couples can effectively double their gifts without triggering the gift tax. For example, a single individual could give his or her three children $45,000 without incurring any gift tax liability ($15,000 per child). A married couple can give each of their children $30,000 each year with the same result.

In addition to the annual exclusion, individuals may transfer up to $11.58 million of assets to their loved ones without having to pay any federal gift tax. This “lifetime gift tax exemption” is the total amount you can give away tax-free over your lifetime. Unlike the annual exclusion amount, the lifetime exemption applies to your total gifts made to all persons.

Using the above example, if you gave each of your three children $30,000 in one year, you would have a taxable gift of $45,000 ($90,000 less the $15,000 excluded from gift taxes annually for each of three recipients). Doing so would use up only a small portion of your lifetime $11.58 million exemption. However, you’d still have $11.535 million left for future gifts during your lifetime or upon your death. As long as you give away no more than $11.58 million over your lifetime, you will not owe any federal gift tax. If you do, your estate would be responsible for any excess at a 40% estate tax rate because the $11.58 million threshold carries over to transfers made at death.

It is important to note that this generous threshold is scheduled to sunset on January 1, 2026, reducing everyone’s exemption by 50%, unless the House, Senate and the President all sign legislation to the contrary.

Lastly, keep in mind that making gifts during your lifetime keeps not only the value of those gifts out of your taxable estate but enables any future growth of those gifted assets to escape estate inclusion as well.