Gifting To Reduce Estate Taxes

Estate planning is a very important aspect of everyone’s financial life, especially as they begin to age and plan for their future and the future of their family members and beneficiaries. The planning process involves preparing an individual’s assets to be passed on to the beneficiaries after their death or incapacitation, and it also includes planning for the settlement of estate taxes. Estate taxes are levied on the value of the estate after an individual’s death, and the larger the estate is in total value the more taxes will be taken from the estate. One way an individual can reduce estate taxes is through gifting, a process that can take place while an estate holder is still alive. The Orange County estate planning attorneys at Evolution Tax and Legal is breaking down the gifting process, and how we can help you minimize your future estate taxes.

How Does the Annual Exclusion Work?

The government allows an annual exclusion of up to $16,000 on gifts. This means that you can give any number of people up to $16,000 each year, and the recipient is not required to pay any taxes on the money, provided it is not gifted from a foreign source. If a gift exceeds the $16,000 limit, the recipient must report the gift using a gift tax return, IRS Form 709, and they will be required to pay taxes on the amount that has exceeded the exclusion. The team at Evolution Tax and Legal can assist recipients of gifts exceeding the annual exclusion amount with filling out Form 709, which is required to be returned alongside the annual tax return in April.

Couples Can Double Their Exclusion

If you hold a joint estate with a spouse or a legal partner, you can double your annual exclusion when gifting out of your estate. This means that you and your partner can give up to $32,000 of non-taxable gifts to any number of people throughout the year. If one partner is making the gift, they can also utilize the double exclusion, provided the second partner consents to the gift.

Gifts to Your Spouse

Any gift you make to your spouse is excluded from taxes, as long as your spouse is a U.S citizen. If your spouse is not a U.S citizen, the limit on tax-free gifts is $164,000. Any dollar amount above that which is gifted to your spouse is subject to taxes. Before gifting any money out of your estate to your spouse, it is beneficial to speak with an estate planning attorney to ensure you are making a decision that will optimize your tax benefits. If you and your spouse own about the same amount of property, gifting them large amounts of money that will be taxes at their death could worsen the tax situation, and may be inadvisable.

Timing Your Gifts

The annual exemption is based on the calendar year, and once the year ends on December 31, you cannot go back to claim an annual exemption amount from the previous year. As such, it is important to time your gifts properly to achieve the optimal benefits from the annual exclusion. If you are planning to gift an amount above the $16,000 exclusion amount, consider spreading it out over a two year period. If you give $30,000 in December, the recipient will be required to pay taxes on $14,000 of the gift. However, if you give $15,000 in December and $15,000 in January, the recipient will face no taxes on the gift.

Giving Away Non-Cash Property

Similar to monetary gifts, gifts of property or stocks can also be spread out across multiple years. For stocks, you can gift some in one calendar year and some in the next, limiting the value up to $16,000 each year to achieve the exclusion amount. For property, you can gift a percentage of ownership to reach the exclusion value in one year, and gift another percentage in the following calendar year.

Gifts to Children

If you are planning on making gifts to children under the age of 18, an adult is required to be responsible for the money until the child comes of age. It is easy to arrange for an adult to manage the property of a child, through either an irrevocable child’s trust or a custodianship which must be authorized by state law. In order to qualify for the annual exclusion, a gift to a minor must be received by the minor outright by the time they reach age 21. This means that any custodianship which is set up for the child must end by age 21, or a trust that is set up must be turned over to the child on their 21st birthday. If a recipient of the gift dies before they reach age 21, the remaining property must be turned over to the recipient’s estate, or another beneficiary which is named in a will.

Other Ways To Give Tax-Free

If you are looking for additional ways to reduce the taxable value of your estate, and give money tax-free, there are other options to consider. A holder of an estate can make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift or affecting your $16,000 gift exclusion. This allows an individual to cover medical bills or costs of education for loved ones, while also reducing the estate taxes in the future. Even if you cover the costs of medical bills or education expenses for a family member or friend, you are still able to gift this individual the $16,000 annual exclusion amount, on top of the costs that you paid directly to a medical or educational institution.

Caveats To Gift Giving

While a strategy of lifetime gift giving can be a great way to reduce estate taxes in the future, while also getting to enjoy watching your loved ones reap the benefits of the money you have worked so hard to earn throughout your lifetime, this strategy is not for everyone. It is important to think before making large gifts. Ensure that you are leaving yourself enough to live on, and if you feel vulnerable or fearful that gifting out of your estate will leave you with not enough to cover the costs of your lifestyle, consider holding off on gifting until you can ensure you will end your life with enough money in your estate to live on comfortably. A gift must be a complete and irrevocable transfer, meaning you cannot ask for the money or property back from a recipient. If you feel a family member, loved one or friend is not yet ready to receive and handle a large monetary gift, it is worth holding off until you are sure they are able to handle and appreciate your generosity.

Before making large gifts in an effort to reduce future taxable estate value, it is worth speaking with a professional. The team at Evolution Tax and Legal is dual-certified in law and accounting, giving us the knowledge and expertise to provide you guidance on financial, tax and legal implications of gifting, and assist you with the process with a personalized touch. Contact the team today to learn more about gifting and estate planning.

May 25, 2022

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