Everyday I meet with families and we discuss the estate planning technique of gifting, which can be a valuable strategy to reduce estate taxes. Gifting can be done on a limited basis or it can be done on a continuous basis as part of an overall plan to reduce estate taxes. Either way it can be relatively easy.
Most people have heard that you can give away $14,000 per year per person (this figure is the 2015 amount and may be adjusted annually due to inflation), but what most people do not realize is that you can give away more than $14,000. The rule is that if you give away more that $14,000, then you have to report the gift to the IRS on Form 709 which is also known as a gift tax return.
When you file the gift tax return, the portion of the gift in excess of $14,000 reduces your Federal lifetime exclusion amount by that excess. Currently the Federal lifetime exclusion amount is $5,430,000. (This figure is the 2015 amount and may be adjusted annually due to inflation.) Right now, no tax is paid until you gift over $5,430,000 during your lifetime. That means if you give away $134,000, let’s say to your daughter, the $14,000 is exempt from gift and estate taxes and your lifetime exclusion amount is reduced by $120,000. Then, at the time of your death, when a Federal estate tax return is filed the $120,000 is brought back into your estate to calculate your Federal Estate tax.
Other tax exempt gifts are gifts to charity, payment of tuition to an educational institution and medical expenses paid directly to the medical provider.
While Maryland does not have a gift tax, it does have an Estate tax that needs to be considered. In 2015 the Maryland estate tax exemption is $1,500,000 and is scheduled to increase to the Federal exemption over the next several years. Since lifetime gifts are not brought back into the estate at the time of death, if you give away $1,500,000 during your lifetime, at your death you will still have an exemption from Maryland estate taxes of $1,500,000. Gifting $1,500,000 during your lifetime avoids approximately $240,000 in Maryland estate taxes.
Another misconception about gifting is that a receiver of a gift has to report the gift on their income tax return. Gifts are not income. However, if you give capital assets such as real estate, stock or a business, the receiver of the capital asset may have to pay a capital gains tax when the asset is sold. As an example, you have stock worth $13,000 with a basis of $3,000 and you give the stock to your son. He sells the stock the day after you give it to him. The gift is exempt from gift taxes, but upon the sale of the stock your son will have to pay a capital gains tax on the difference between the sales price and the basis.
Knowing what assets to gift is the key. Gifted assets get a carry over basis so the best asset to give away is an asset without a capital gain, such as cash. However, if you want to reduce your estate and you do not have liquid assets such as cash, you will want to meet with an accountant or an attorney to discuss the various taxes involved in gifting capital assets like stock, businesses or real estate.
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