The end of year rush to use your 2022 annual gift exclusion of $16,000 (per individual) is over. But there’s good news, we are now in 2023 and the annual gift tax exclusion has increased to $17,000 (or $34,000 for a married couple). More good news, you do not have to wait until December to spread that annual gift tax exclusion cheer.
There are several benefits to gifting early in the calendar year versus waiting until the end. Sometimes, the benefit depends on the asset. For income producing property, the income from the asset after the completed gift will accrue outside of your estate, and there is a good chance that the giftee is in a lower tax bracket than you. If there is an asset you believe will have significant appreciation over the next 11 months, then you should think about gifting it now. The appreciation after the gift will accumulate outside of your estate. One caveat to this strategy is for assets that already hold significant appreciation. If you gift the asset now, then the giftee obtains your low transferred basis and they would be responsible for the tax on that appreciation if they sell the asset (as well as any appreciation post-gift). If the highly appreciated property is transferred at death, the recipient obtains a step-up in basis to the Fair Market Value of the asset at the time of your death. It is always advantageous to consult with your Financial Advisor as to basis related strategies.
Another benefit to early gifting is avoiding timing mistakes. If you gift someone money via check, the IRS has ruled that the gift is not complete until that check is cashed. Checks are generally good for 180 days, so that can lead to unintended consequences if you have a giftee who isn’t exactly punctual. Timing of gifts for assets like securities can take time to clear with the responsible institution and can delay the completion of the gift, so it is best to give yourself adequate time.
On a slightly morbid note, no matter what sort of health you’re in, you simply don’t know if you’ll be around at the end of the year. Gifting early in the calendar year avoids that risk and allows the gift tax exclusion amount to escape taxation in the case of your untimely (and unfortunate) death. If you are in poor health, that is just another reason to use that gift tax exclusion as soon as possible. As long as it is a completed gift, it will not be included in your estate.
Utilization of the annual gift tax exclusion is an easy way to decrease the size of your estate each year, and is a strategy often overlooked or forgotten. However, if done correctly over several years, it can be very advantageous to your overall estate plan. Just make sure that you give yourself enough time to complete the gift for tax purposes, and that you understand the asset profile of the gift as well as the possible tax implications of the transfer to you and the recipient.