Lifetime Gifting: A Strategic Approach to Wealth Transfer

Consider the financial strategy of lifetime gifting, a powerful wealth-building approach. Learn about its advantages, the balance between present financial needs, gifting and the importance of staying updated on estate tax exemption laws.

Key Takeaways:

• Lifetime gifting is a strategic approach that enables you to achieve long-term financial goals and preserve assets for the next generation. 
• Use a thorough financial plan to strike a balance between your present-day financial needs and gifting. 
• Choose the right gifting strategy for your needs and keep an eye on upcoming changes to lifetime exemption laws. 

Most traditional estate plans wait until the end of life to distribute assets. However, this approach cuts off a strategic (and wealth-building) approach: lifetime gifting.

Proactively transferring wealth during your lifetime can unlock key benefits. Beyond generosity, lifetime gifting serves as a lever to achieve long-term financial goals, preserve assets and leave the legacy you desire for your loved ones.

With evolving tax regulations and the pressing nature of time, understanding the intricacies and potential of lifetime gifting has never been more critical. This guide is designed to illuminate the many facets of a lifetime gifting wealth transfer strategy and help you navigate its complexities to shape a legacy that stands the test of time.

Benefits of Lifetime Gifting

Lifetime gifting is not just an act of generosity but a profound strategy that can shape your financial legacy.

• Growth beyond tax reach. To truly grasp the benefits of lifetime gifting, consider the potential of compound growth. For instance, with the rate of return being 5% annually, a proactive gift of $1 million now could burgeon into an impressive $2.65 million over two decades. This growth remains untouched by estate tax, preserving more wealth for the next generation.
• Reduce future tax liabilities. Delving deeper into the intricacies of wealth transfer, one recognizes the pivotal role of substantial gifts. These gifts are not just about sharing wealth in the present but about significantly curtailing future estate and generation-skipping transfer taxes. It’s a strategy that ensures your assets benefit your loved ones more than they benefit the tax collector.
• Increase flexibility in estate planning. Your financial journey and legacy are uniquely yours, and your estate plan should be, too. By incorporating a mix of strategies, such as annual exclusion gifts, directly addressing educational and medical expenses, and altruistic charitable contributions, you not only tailor your financial legacy but also position yourself to adapt and respond to changing financial landscapes and personal milestones.

Lifetime gifting can help you reduce taxes and increase your financial flexibility.

The Balance Between Gifting and Financial Needs

It's essential to remember that while you're paving a path for the next generation, your present-day needs and dreams matter, too. To strike a balance between gifting and your ongoing financial needs, consider the following:

• Make sure to preserve your lifestyle. As you navigate lifetime gifting, ensure your quality of life remains intact. Every financial decision, including gifting, should be made with an eye on preserving the lifestyle you've worked hard to attain.
• Keep an eye on your personal cash flow. Gifting strategies, though beneficial in the long run, can have an immediate impact on your cash flow. It's crucial to evaluate and understand how these gifts might reshape your current financial landscape. Detailed personal cash flow projections offer insights into the short-term and long-term impacts of your decisions.
• Plan for future needs. A well-balanced financial plan will include a cushion for future events. Consider, for instance, investments like home renovations, which can increase the value of your property, or medical expenses that might arise as you age. Setting aside funds for these eventualities not only ensures that you're prepared for life's unpredictabilities but also allows you to live with peace of mind.

Lifetime gifting requires a careful balance between present and future needs.

Choosing the Right Gifting Strategy

Outright vs. Trust-Based Gifting

When deciding on a gifting strategy, one fundamental choice to consider is whether to make an outright gift or use a trust-based approach.

Outright gifts are straightforward and provide immediate benefit to the recipient. They are typically simpler to execute and require less administrative oversight once the gift has been made. However, once transferred, you relinquish all control over the asset, leaving decisions regarding its use and management entirely in the hands of the recipient.

On the other hand, trust-based gifts offer a way to transfer assets while maintaining some level of control or influence over them. Trusts can stipulate conditions or criteria for disbursing assets, providing a means to ensure they're used in ways that align with your wishes or intentions. Trusts can also offer specific tax advantages, depending on their structure and purpose.

Variety of Trust Vehicles

The world of trusts offers a number of options tailored to different goals and situations. Choosing the right type of trust is pivotal in ensuring that your wealth transfer goals are met effectively.

Revocable trusts, for instance, offer flexibility, allowing you to alter or dissolve the trust if circumstances change. They are especially useful in avoiding probate and ensuring a seamless transition of assets.

Irrevocable trusts, while more rigid, can provide greater protection from creditors and potential lawsuits. They can also serve as vehicles for specific purposes, such as life insurance trusts or charitable remainder trusts.

Beyond these, there are specialized trusts designed to fulfill unique purposes, like generation-skipping trusts or qualified personal residence trusts. Each trust type comes with its own set of advantages, often tied to estate tax benefits, asset protection, or both.

In all cases, the selection of a trust should be done in consultation with a financial advisor or attorney. They can guide you to a trust structure that aligns with your financial circumstances and your broader wealth transfer objectives.

Work with a financial advisor to determine the right gifting strategy to meet your goals.

Which Assets to Prioritize

Deciding which assets to gift is as significant as determining the gifting strategy itself. Making well-informed decisions in this area can greatly increase the benefits of your gifting, ensuring both you and the recipient reap maximum advantages.

One key strategy to consider is gifting assets with high appreciation potential. By transferring these assets, you're not only removing their current value from your taxable estate but also any potential future appreciation.

For instance, if you gift an asset today that is anticipated to significantly appreciate in value over the next decade, all of that growth will occur outside of your taxable estate, providing an efficient way to reduce potential estate tax liability.

Another smart approach involves using valuation discounts. Certain assets, especially those with limited marketability or those where the recipient has a lack of control, might qualify for a valuation discount. This essentially means the asset is valued at less than its fair market value for gift tax purposes.

For example, an asset worth $10 million that qualifies for a 20% valuation discount can be gifted as if it were worth just $8 million. This strategy allows for a larger portion of wealth to be transferred without fully consuming one's gift tax exemption.

Lastly, it's crucial to understand the implications of the carryover of the taxpayer's cost basis. When you gift an asset, its original cost basis (essentially, what you paid for it) carries over to the recipient. This can have capital gains tax implications for the recipient when they eventually sell the asset.

Before gifting, consider the impact of each asset. Some assets may yield higher tax savings when gifted than others.

Stay Updated on Estate Tax Exemptions

A final step in a lifetime gifting strategy is to remain aware of upcoming changes in estate tax exemption laws. As exemption laws change, the impact of gifting changes with it. Keep an eye on financial outlets, or work with a financial advisor, to stay up to date on the latest information.

For example, there's a scheduled reduction in lifetime exemption amounts set for 2026, dropping to around $6.4 million per person. This is a nearly 50% reduction in the exemption amount, which may impact your ability to use this strategy. The clock is ticking.

Considering a Lifetime Gift?

Work with the experienced advisors at Comerica. We’ll help you identify the right strategy, anticipate your future needs and keep an eye on changing laws. Contact your Comerica Relationship Manager or contact Comerica today.