Erin Calpin, Esq.
Gifting is a powerful tool to consider for estate planning and tax savings. Not only can it help you reduce the size of your taxable estate, but it can also be used to provide financial assistance to your family members.
When done correctly, gifting can be an effective way to ensure that your estate passes on to those you care about with the least amount of taxes and other costs.
Here, we'll explore the benefits of gifting, its use for estate planning, and how it can result in tax savings.
How Is Gifting Defined in the Area of Estate Planning?
In estate planning, gifting is the transfer of money or property from one person to another without the expectation of repayment or receiving anything of value in return. Gifting can take many forms, such as cash or investments, real estate, tangible personal property, or artwork.
Gifting is often used to reduce the size of an estate to minimize estate taxes upon death. It can also be used to ensure that family members or close friends will be provided for after death. It helps reduce an estate’s overall value, making it easier to pass on assets to family members without paying high taxes.
Additionally, gifting can be used to help reduce the amount of time necessary to settle an estate. By transferring assets ahead of time, the burden of asset distribution is reduced, and the estate can be settled more quickly. Finally, gifting allows for the transfer of assets without probate court proceedings, which can be both costly and time-consuming.
Giving Legally Valid Gifts
For a gift to be considered valid, it must meet certain criteria established by law. Generally speaking, the gift must be voluntary and irrevocable; it must be made with no expectation of repayment, and the recipient must accept it in writing.
Depending on where you live, certain restrictions may apply to gifting. Understanding your state's laws is important before making any money or property transfers.
What Benefits Can Gifting Bring to Your Estate Planning?
Some of the benefits that gifting can bring to your estate planning include the following:
- Reducing the value of your estate for tax purposes.
- Providing greater control over how assets are distributed and to whom.
- Lessening the amount of taxes due on your estate.
- Giving you the ability to spread out the transfer of your assets over time.
- Allowing you to give money to family members and other loved ones while you’re still alive.
- Providing more freedom in choosing an executor, trustee, or guardian for your estate.
- Allowing you to plan for the future needs of your heirs without having to liquidate your assets.
- Providing a way to give to charities that may not be eligible for certain tax exemptions.
- Enabling you to transfer assets quickly, easily, and cost-effectively.
Work with an experienced estate planning attorney to help you iron out the specific benefits that gifting can bring to your estate plan.
How Can You Legally "Gift?"
By gifting assets during your lifetime, you can reduce the size of your taxable estate and ensure that your heirs will not have to pay estate taxes on the gifts.
However, gifts in excess of the annual exclusion amount (discussed later) are subject to a gift tax imposed by the IRS. The gift tax is based on the value of the gifted asset. For example, if you give away $50,000 worth of stock to a family member, you will owe a gift tax of $10,000 (assuming a 20% rate). Gift tax rates range from 18% to 40%.
The gift tax is typically paid by the person making the gift, but there are certain circ*mstances in which the recipient can pay it. And if the person making the gift has not exhausted his or her gift tax exemption (currently $12.92million), the donor (person making the gift) may not have to actually pay the gift tax.
How Can Gifting Be Used as a Tool for Estate Planning and Tax Savings?
In addition to reducing your taxable estate, gifting can also be used to provide financial support for family members. For example, you may make a large financial gift to your children or grandchildren that they can use to start a business or fund their college education.
Under current tax law, you can give away up to$17,000 per person annually without triggering any gift taxes. This is known as the Annual Exclusion Amount, which is usually adjusted every year. So, if you have four children, you can give each of them up to $17,000 each year without paying any taxes on the gifts, and without triggering a gift tax return.
Additionally, married couples can combine their annual exclusions and give up to $34,000 per year per person. This can be especially useful if one spouse has more assets than the other and wants to help them financially.
Lastly, gifting can also be used to reduce your income taxes. Gifting to qualified charitable organizations can be used to offset taxable income. And by giving appreciated assets away during your lifetime, such as stocks or real estate, to persons in a lower tax bracket, you can avoid incurring the capital gains taxes on those assets if they were sold at a higher rate in your own higher tax bracket.
What Are Some Things to Consider Before Gifting?
Gifting is a great tool for estate planning and tax savings, but it is important to consider some factors before giving. Here are some things to consider before gifting:
- Consider the amount of money you are giving. Make sure the amount you are giving is reasonable in relation to your overall estate plan.
- Make sure you have enough assets to gift. You will need enough funds or assets to cover the amount you are gifting, and any potential future liabilities associated with the gift.
- Think about who you are gifting to. Is the person capable of managing the money responsibly? Are they a minor or dependent? Does this person have any special needs that must be taken into account?
- Research any applicable laws, taxes, or restrictions related to gifting. Gifting has many advantages but be aware of any applicable taxes or legal obligations associated with your gift.
- Consider the financial impact of gifting. Will gifting affect your ability to cover expenses or maintain your desired lifestyle? Will you need to make any changes to your financial plans due to your gifting decisions?
Gifting is an effective way to provide for those you love and manage your estate plan more effectively. However, it is important to carefully consider all factors before making any gifting decisions.
The Gift Tax Exclusion vs. the Gift Tax Exemption
The Annual Gift Tax Exclusion, as of 2023, is$17,000. This allows you to make gifts up to $17,000 per year, per recipient, without paying any federal gift tax or triggering a gift tax return. Gifts in excess of the Annual Exclusion must be reported on a gift tax return.
The Gift Tax Exemption is an exemption that can be used to offset the gift tax. For example, if you made a gift of $117,000 to a friend, you would have to report that gift by filing a gift tax return, because the size of your gift exceeds the Annual Exclusion amount. The first$17,000 would not be taxable, but the excess $100,000 would be taxable. However, if you have not used your Gift Tax Exemption during your life, or if you have at least $100,000 of that exemption left, then the available exemption can be used to offset the $100,000 taxable gift, and no gift tax would be due.
Understanding how the Exclusion and the Exemption work and how they can be used as tools for estate planning and tax savings can help maximize the benefits of gifting.
Gifting for Tax Savings: Some Caveats
Gifting can be a great tool to increase estate savings and reduce estate taxes, but there are some caveats to remember before making any gifting decisions. The gift tax rules can be complex and require careful consideration of all applicable laws and regulations.
Additionally, the Internal Revenue Service(IRS) closely scrutinizes gifts made for tax savings purposes and may deny such deductions. While there are certain exemptions from the gift tax, these vary based on the giver, recipient, and purpose. Consider the gift size, the frequency of gifting, and the specific type of property gifted.
To avoid any misreporting or misunderstandings, ensure that both the donor and the recipient are aware of the gifts given and received and all applicable rules and regulations of gifting.
Maximize Estate Tax Savings With Help From BMC Estate Planning
Working with a qualified estate planning attorney can help you make informed decisions and help you understand the risks and rewards associated with gifting for tax savings purposes.
