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How Women Can Optimize Their Gifting Strategies

How Women Can Optimize Their Gifting Strategies

| March 25, 2024

Combining today's low gift tax rates with a historical peak in the lifetime gift tax exemption amount (currently $13.61 million), now could be a great time for women to pass along assets to family members and other loved ones.1 Giving these gifts today may result in favorable tax treatment and mitigate the risk that these exemption amounts will be reduced in the future. Read on for three ways women can structure their gifting strategies to manage taxes and address the financial impact of each gift.

Using the Annual Exclusion Strategy

Each year, one person can give another person (or as many other people as they'd like) up to $18,000 without incurring any tax penalties. This means a married couple can give up to $36,000 annually to their family members without tax consequences. But while handing over cash can be a simple way to accomplish this goal, a few alternatives can come with even more tax benefits.

UGMA or UTMA Accounts

The Uniform Gift to Minors Account (UGMA) or Uniform Transfer to Minors Account (UTMA) are two accounts by which a benefactor can gift money to a minor without impacting their ability to qualify for college financial aid, including subsidized loans. There are a few main differences between UGMA and UTMA accounts:

  • A UGMA account matures when the beneficiary turns 18, while a UTMA account allows the benefactor to select a maturity date between 18 and 25.
  • A UTMA account offers a broader array of investments, while a UGMA account generally consists only of cash, stocks, or annuities.
  • An UGMA account can be used for support purposes during the college years, while a UTMA account has fewer restrictions on use.2

Passing along up to $18,000 per year to these accounts can allow benefactors to boost their younger loved ones' net worth without potentially disrupting the college admissions process.

Grantor Trusts

A grantor trust allows the person who creates the trust to continue to own and maintain control over trust assets and property during their lifetime. Grantor trusts are revocable living trusts, which means the person who established the trust will be responsible for paying any taxes on trust proceeds during their lifetime. In other words, instead of paying these taxes from the trust proceeds themselves—thereby reducing the amount of gifted assets held in the trust—the grantor will pay these taxes outside the trust, keeping its principle intact. This outside tax payment can convert the trust assets into a tax-free gift for those benefitting from the trust proceeds.

Crummey Trusts

Parents often use these trusts to provide financial gifts to their children, as they allow parents to benefit from the gift tax exclusion while keeping the ability to limit how and when the trust beneficiary can access the assets. Once the beneficiary turns 18, they are granted immediate access to the Crummey Trust. However, the parent or trust settlor can still place additional restrictions on trust assets (such as allowing the beneficiary to withdraw only the most recent gift, not prior gifts, or restricting all withdrawals until age 25). A parent who faithfully contributes the maximum $18,000 per year to a Crummey trust upon the birth of a child should be able to present this child with a tax-free $324,000 gift (assuming no investment growth or increase in the gift tax exemption) on their 18th birthday.

Upcoming Changes to Gift Tax Exemptions

In two short years, the lifetime estate and gift tax exemption ($13.61 million) will be reduced by about half. This means that gifts given in 2026 and beyond that exceed this exemption amount could be subject to a hefty

gift tax of up to 40%. By giving gifts between now and 2026, you can continue to take advantage of the high lifetime tax exemption while it remains in place.

Each option can aid the tax-free transfer of wealth to family members or loved ones. A financial professional can help you determine which option (or options) make the most sense for your unique circumstances.




Footnotes

1 “What is the Gift Tax Exemption for 2024?” Kiplinger, https://www.kiplinger.com/taxes/gift-tax-exclusion

2 “The Difference Between UGMA and UTMA,” Difference Between, http://www.differencebetween.net/business/finance-business-2/difference-between-ugma-and-utma/


Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate, consult your financial professional before investing.

The information provided is not intended to substitute for specific, individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

All information is believed to be from reliable sources; however, LPL Financial does not represent its completeness or accuracy.

This article was prepared by WriterAccess.

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