Gifting to your heirs before you die has a huge tax savings for you, and possibly timing for your heirs. Gifts of money or property allow you to provide your heirs with funds or property when it will have the most significant impact and it is tax-free.
Whether providing a down-payment on a home, sending your grandchildren to college, or providing family members with a vacation to remember, making gifts during your lifetime permits your heirs to appreciate their inheritance when you are alive. Many family members receive an inheritance upon the death of a parent or relative. Often times the inheritance recipient is financially comfortable and established. Gifts made prior to death may permit family members to utilize their inheritance when most needed.
Gifts also have some estate planning benefits. They reduce the value of your estate, as well as your tax burden. You are permitted to give away a lot of money tax-free, and that can be a win-win for everyone.
Under federal tax law, estate holders are permitted to give away up to $14,000 a year per person tax-free. When a married couple makes a gift, the exclusion increases to $28,000. The gift can take any form, cash, an interest in property, or even a business. In addition, for gifts of high value assets, the exclusion may be spread out over five years. However, there are some restrictions on gifting. An estate holder is limited to giving away $5.43 million during their lifetime. Any gifting in excess of that amount will be subject to a federal estate tax of 40 percent upon the estate holder’s death. In addition, recipients of gifts may be subject to state and federal income tax and possibly a state gift tax. Federal income tax is assessed only on the value exceeding $14,000, but state income and gift tax rules vary state by state.
California does not currently have a gift tax. However, gifts of property located outside of the state, or gifts made to people who reside out of state, may be subject to the gift or income tax laws of those states. Therefore, when making gifts that fall into those categories, it is important to consult with an attorney to minimize the tax implications.
The following gifts, no matter their value, are exempt from federal gift taxes:
- Tuition. You may pay the tuition for another, if direct payment is made to the educational institution. There is no limit on the amount that can be funded, or on the number of years tuition can be paid.
- Spousal gifts. If your spouse is a U.S. citizen, there is no limit on the value of gifts that may be made to him or her. However, if your spouse is not a U.S. citizen, there is a limit of $143,000 per year on tax-free gifts.
- Medical expenses. An estate holder may pay the medical expenses of another with no tax implications for either party, if payment is made directly to the person or organization providing the care. Qualifying expenses include diagnosis, treatment, medical procedures, transportation related to care, and medical insurance.
- Bank, brokerage accounts or U.S. Savings Bonds. If a joint tenant is added to any of these accounts, it is not considered a gift until the new tenant withdraws funds.
- Charitable donations. Gift tax restrictions do not apply to gifts made to qualified charitable organizations.
- Gifts made to minors. Gifts made to children 17 and younger are not included in the lifetime gift tax exclusion, as long as the gifts are made outright to the minor or deposited into a custodial account governed by Uniform Gifts to Minors Act (UGMA), the Revised Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act (UTMA). The gifts must, however, be no more than $14,000 per year. Only payments not required by law are considered a gift, for example, support paid as the result of a divorce or paternity judgement.
Gift tax restrictions apply to any gifts made by check, reduced or interest-free loans, payoffs of indebtedness of another, adding a joint tenant to real estate, and gifts of foreign real estate by a U.S. citizen. However, gifts made by an individual to a corporation, or gifts of real or tangible property, are subjected to different calculations and may require consultation with an attorney.
There are no restrictions on how the gift is given, for example, delivered directly to the recipient, placed in a trust or account, or by purchasing an item of value, such as a car.
The primary goal of gifting should be to reduce estate taxes after death. Removing property from your estate during your lifetime reduces its value, minimizing estate taxes.
However, that does not mean gifting always benefits the estate holder. The first consideration should always be the impact on the estate holder and their financial well-being. Gifts that reduce an estate holder’s standard of living, or impact their ability to enjoy their lives, make no sense.
In addition, once a gift is made, you have given up control of that object, and may not demand its return. You also may not continue to receive income from it. If a recipient has poor credit or is involved in a divorce, the gift can be claimed by creditors or become part of the property settlement in the divorce. Finally, gifting may impact eligibility for Medi-Cal nursing home assistance.
Gifts are an important estate planning tool, but they should be used wisely. Not all gifts work to the benefit of the estate holder or their heirs. Some assets may best be passed via a will or trust. When developing a gifting strategy, it is important to consult with an estate planning attorney to ensure that you maximize the benefits and minimize your losses.