Podcast Summary: The Practical Planner

Episode: Everything You Need to Know about Gifting (& Taxes)
Date: September 10, 2024
Hosts: Thomas Kopelman and David Haughton

Overview

In this episode, hosts Thomas Kopelman and David Haughton dive deep into the nuances of gifting in estate planning, with a particular focus on the practicalities, strategies, and tax implications that advisors need to know. The discussion centers on debunking common myths, outlining various gifting techniques, and providing actionable insights for advisors serving a wide range of clients—from those seeking to help family with educational or housing costs, to high-net-worth individuals navigating business or trust strategies.

Key Discussion Points & Insights

1. Dispelling Gifting & Gift Tax Myths

• Annual Exclusion Limits and Realities:
  • Many people believe gifts above $18,000/recipient/year are automatically taxable.
  • Clarification: Gifts above $18,000 are reported but not taxed unless you exceed your lifetime estate/gift exemption ($13.61M per person, or $27.2M for a married couple).
  • “I hear literally every day...clients think, ‘okay, well I can give $18,000, but if I give anything else, it’s taxable.’ And at the end of the day, this isn’t true.” —Thomas Kopelman [00:33]

2. Gift Strategies Beyond the Basics

• Splitting Gifts as a Couple:

  • Couples can double the annual exclusion per recipient, even further if the recipient is married, multiplying the gifting potential.

• Filing vs. Paying Taxes:

  • Gifts above the exclusion require filing a gift tax return, but rarely trigger actual tax unless the lifetime exemption is exceeded.

3. Education and 529 Superfunding

• Superfunding Explained:

  • Advisors often recommend “superfunding” a 529 plan (contribute 5 years’ worth of exclusions upfront—$90,000 per spouse, per recipient, or $180,000 for a couple).
  • Must file a gift tax return and elect to spread the gift; no further gifts to that recipient can be made for five years unless the limit goes up.
  • “That’s a really powerful tool. Obviously you have to survive the five years to be able to use all five years.” —David Haughton [04:52]

• Direct Payment of Tuition or Medical Costs:

  • Paying directly to a school or medical provider is entirely exempt from gift tax and does not count against the annual limit.
  • “If you pay directly for college tuition, that is something that would kind of fly under the radar, so to speak.” —David Haughton [05:48]
  • Applies to anyone, not just dependents. [07:01]

4. Assisting with Home Purchases

• Gifting Down Payments:
  • Parents helping children buy homes (especially in high-cost markets) can gift down payments either at once (using the exemption) or spread over several years.
• Intra-family Loans:
  • Families can structure loans at IRS-prescribed rates (AFR), formalizing the transaction.
  • Interest earned is taxable income to the lender; must comply with formalities (documentation, payment schedules).
  • “A lot of people don’t do that...you got to make sure that you follow the formalities.” —David Haughton [08:56]

5. Transferring Business Interests, Stock, and Other Assets

• Immediate Gifting versus Posthumous Transfers:

  • Gifting appreciated assets during life forfeits the step-up in basis, possibly saddling recipients with large capital gains.
  • “You do lose a lot of the tax benefits by gifting while alive versus when you pass away and getting that step up in cost basis.” —Thomas Kopelman [11:03]

• Discounted Valuation for Business Interests:

  • Interests in private businesses can be discounted (e.g., 75 cents on the dollar), saving on exemption usage.
  • Importance of adherence to complex formalities—advisors critical for client compliance.
  • “[The advisor] said he was never going to follow through with that... you should have done something less complex, less sophisticated.” —David Haughton [13:10]

• Advisor Accountability:

  • Advisors’ role in persistent follow-up and behavioral accountability (“it takes double digit reminders before they do their estate planning”). —Thomas Kopelman [14:35]

6. Irrevocable Trusts and Grantor Trusts

• Gifting to Irrevocable Trusts:
  • Effective not just for using current exemption, but for removing future appreciation from the taxable estate.
  • “People get so caught up in using the whole exemption, they actually don’t think about the growth that comes out of the estate, which is maybe one of the most impactful parts.” —Thomas Kopelman [16:54]
• Grantor Trusts:
  • The settlor pays tax on trust income (a “tax burn”), reducing the estate further and bypassing additional gift tax.
  • Trust tax rates are very high, so paying tax at personal rates is usually preferable.

7. Life Insurance as a Gifting Tool

• Policies (especially via trusts like ILITs) allow for guaranteed, fixed gifts to heirs or organizations, efficiently transferring wealth outside the taxable estate.
• “Even just having either a permanent policy or a term policy that has, hey, I want to make sure that I give a million to each child...” —Thomas Kopelman [19:03]

8. Charitable Gifting (Briefly Mentioned)

• Recognized as a vast topic for separate discussion.
• Donor Advised Funds can introduce next generations to family philanthropy with less administrative burden than private foundations.
• “That’s a situation where...you bring in the next generation to actually get them involved in charitable giving with something that they can never take back.” —David Haughton [20:27]

Notable Quotes & Memorable Moments

• “You can gift more than $18,000...this isn’t a taxable thing unless you’ve already crossed that exemption, which we know 99% of people in the United States have not.”
  —Thomas Kopelman [00:21]

• “If you actually pay directly for tuition, that is a tax free gift, that's not going to even impact your $18,000 annual exemption.”
  —David Haughton [05:43]

• “I had a client ...and he hadn’t done anything the way that he was supposed to. He was depositing checks ...directly into his individual account, was not following any of the formalities ...as far as the IRS is concerned, that was pretty much smoke and mirrors.”
  —David Haughton [12:23]

• “It takes double digit reminders before they do their estate planning, before they set up the meeting, whatever. ...As the advisor, you can drive the...accountability.”
  —Thomas Kopelman [14:35]

• “I was having this conversation earlier with a client...maybe you’re not going to use all $13 million, but even if you move $1 million...that could be worth $5, 10 million down the line.”
  —Thomas Kopelman [16:42]

Timestamps of Key Segments

• 00:33 – Debunking the $18,000 gifting myth
• 03:15 – Overarching structure: ways to gift & unique strategies
• 04:15 – 529 superfunding explained
• 05:38 – Direct tuition/medical payments vs. gift tax
• 07:02 – Gifting for home purchases and intra-family loans
• 10:08 – Tax consequences of family loans
• 11:03 – Risks/gains in gifting appreciated stock
• 12:23 – Business transfers: when complexity backfires
• 13:10 – Importance of advisor-client relationship for practical planning
• 14:35 – Advisor accountability and facilitating execution
• 16:42 – Gifting for growth, not just exemption usage
• 19:03 – Life insurance as a gifting strategy
• 20:15 – Charitable giving and donor advised funds

Takeaway for Advisors

• Get the facts right: Gifting above the annual exclusion is rarely “taxable” unless discussing ultra-high net worth clients.
• Understand and leverage special rules for tuition, medical, business interests, and 529 plans.
• Prioritize practicality: Complex strategies are powerful but only work if clients actually implement them—advisor persistence and deep relationship matter.
• Don’t underestimate the value of growth—gifting early, even modest amounts, can yield major long-term benefits.
• Stay tuned for a deeper charitable giving episode.

By focusing on practical implementation, the hosts provide advisors with concrete, actionable knowledge to elevate their estate planning counsel well beyond the generic advice found online.