Skip to content

Advisor Perspective

Advisor Perspective

Taking Advantage of the Annual Gifting Exclusion

Will Alexander

Advisor, CFP®, J.D.
Will anticipates clients’ complex needs proactively and responds to them quickly, helping them preserve and grow assets with thoughtful, custom solutions. He’s passionate about empowering individuals and families to fulfill their goals and dreams and appreciates the opportunity to share in those experiences.

Read Will's Bio →

When it comes to estate planning, the focus tends to fall into two areas: ensuring that assets flow to the correct beneficiaries at death and minimizing estate taxes through gifting strategies. While the former applies to everyone, the latter may not be an issue for most. This does not mean, however, that there are no benefits to making gifts during one’s lifetime. From a planning perspective, we cannot be certain where tax law may go in the future. Those not currently exposed could be so if the lifetime exemption is reduced or their assets grow. From a personal perspective, the giver gets the opportunity to see the benefit of their gift on the lives of those dearest to them. For children or grandchildren, this may be at a time in their lives when they are just beginning to secure their financial foundation. Alternatively, it could illustrate that one’s heirs are financially irresponsible and inheritance plans should be altered to restrain the misuse of funds.

So how do we take advantage of gifting without making sizeable transfers that could have an impact on our own future financial success?

Known as the Annual Gift Exclusion, the IRS permits an individual to gift up to $16,000 per person in 2022. There is no limit on the amount of people that can receive this amount in gifts and provided gifts do not exceed this amount, there is no gift tax consequence or need to file a gift tax return.

What to Gift?
While a gift of cash is the easiest and most fungible for the recipient, it may not align with cash flow goals. A common alternative is securities such as stocks and bonds. A benefit is that these can be transferred relatively easily, but the cost basis is transferred with the gift. Personal property (a car, jewelry, etc.) is also an option. It’s important to remember that the exclusion amount is cumulative, so all gifts for the year need to be taken into consideration.

How to make the Gift?

  • Outright – The simplest way to gift assets is directly to the recipient. Whether through a check or transfer to their account, this method of gifting is a one-step process. An aspect to consider is that once completed, the recipient is free to use and spend the gift as they please.
  • Minor’s Account – For those not old enough to have their own accounts, gifts can be made to a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account. These accounts are controlled by an adult custodian and legally turn over to the child at their age or majority, typically at age 21 . While excellent for their simplicity, this turn over to the child can be a considerable drawback. If gifts are being made over several years, then the accumulation could result in access to a sum of money at an age most wouldn’t consider mature enough to handle.
  • Education Account – If funding a college education is a priority, then gifting into a 529 plan account could be a great option. These accounts have the advantage of growing tax-free and distributions are not taxed provided withdrawals are used for qualified education expenses. Additionally, although these accounts are for the benefit of the student, the account holder can be a parent/grandparent . This provides more control over the use of the funds.
  • Trust – If limiting the access to these gifts is an important consideration, then another option is putting these gifts into an Annual Gift/Crummey trust. This is an irrevocable trust that can make distributions or grant control of the trust to the beneficiary at specified ages and/or once other criteria set forth in the trust are met. The limited access also provides protection from creditors and divorce settlements of the beneficiary. An important aspect of utilizing the annual exclusion is that the recipient must have a present interest in the gift. This requires the beneficiary have a right of withdrawal at any time additional contributions are made, colloquially known as a Crummey letter. Attorney costs and these letters increase the administration of this method of gifting, but this drawback rarely outweighs the benefits of access restriction.

If you would like to have a conversation about gift planning, please call your JMG advisor. The contents of this article may or may not be directly applicable to your situation. In either case, we encourage you to pass this along to someone who may find it helpful.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this writing, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG Financial Group, Ltd. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm nor a certified public accounting firm and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure statement discussing advisory services and fees is available for review upon request.