When it comes to distributing your money, you might not be able to think of any good reasons to just give it away.
But there are important tax implications for monetary gifts, and they can be beneficial to someone with a sizable estate. If your estate totals more than $11.4 million alone, or $22.8 million for married couples, then your heirs will pay a federal estate tax when you die. That tax can be up to 40%, so many people like to plan in advance, to help preserve wealth for their heirs.
The same is true for the state estate tax. Most states match the federal estate tax, but some states have lower exemption amounts. In the state where I practice, Washington, the state exemption is lower than the federal: $2,193,000.00. But in our neighboring state of Oregon, the exemption is only $1 million. Knowing the laws of your state can also help you make good choices when it comes to giving gifts.
There are many other reasons why you might be giving a large, cash gift: helping a child with a down payment on a house or paying a grandchild’s tuition, for example. To the IRS, this transfer of money to your loved one is considered a gift.
According to the federal government, you may make a gift of up to $15,000 per year to any individual without having to file a gift tax return. And it’s not $15,000 total for the year; it’s $15,000 per recipient. So you can make many $15,000 gifts each year.
It’s also important to note that this $15,000 exemption is allotted to each spouse. If you are married, you and your spouse can give total of $30,000 to any one recipient without filing a gift tax return (that’s $15,000 each).
When your gift exceeds $15,000, you will need to file a gift tax return to the IRS. But filing this form with the IRS does not necessarily mean you will have to pay a tax on it. In fact, in most cases, you won’t have to pay tax on the gift as long as you are under the lifetime gift exemption. Each individual has a lifetime gift and estate exemption of up to $11.4 million, and any money above your $15,000 exemption for each year simply counts against your lifetime exemption.
Most people won’t reach the lifetime exemption of $11.4 million per person and have to pay a gift tax. But if your estate is considerably larger than the lifetime exemption, or larger than the exemption amount in your state, you might consider lowering the taxable amount of your estate by making gifts to your heirs in advance of your death. After all, you can’t take it with you, and you’ve likely accrued your funds with their care in mind.
Don’t forget to consider the laws of your state. As someone who thinks about estate planning and your financial future, you should consider other tax consequences such as capital gains or income taxes. Sometimes, gifting with the goal of preserving an estate tax creates a capital gains tax that far exceeds the estate tax benefits.
That’s why you will want to make any substantial gifts with the assistance of an attorney. They know the laws of the state where they practice, so they can advise you beyond the federal exemptions. They can help you discuss what types of assets are best to give as gifts–real estate, cash, or otherwise–and they can help you decide what type of gift will provide for your heirs in the way that’s important to you.
Finally, if you are supporting an heir or another loved one by paying for tuition or medical bills, consider paying the institution directly, which will help avoid having to file a gift tax return.
When it comes to creating an estate plan that truly serves your needs, gifts can be an important part of the planning. Consult an estate planning attorney in your state to be sure you are making gifts according to your state laws. Whether your priority is preserving your estate or providing for your loved ones, an experienced estate planning attorney can answer your questions.
The Side by Side Planner is here to make your meeting with an attorney as easy as possible.