For many, a reduction in estate taxes is an important priority. You can incorporate lifetime gifting in your estate planning efforts that will minimize taxes and just as importantly, you’ll be able to see the good things your gifting results in. It’s a great strategy and one that too many overlook.
Many Advantages to Lifetime Gifting
It really is better to give away money during your lifetime than to leave it to your heirs after you’re gone. The good news is there are many ways to do this – and they’re gift-tax free while you’re still living. If, however, your estate is subject to the estate tax, those taxes will come directly out of what your loved ones would otherwise inherit.
One of the biggest reasons lifetime gifting works is because any future appreciation on the gift is given away, too. This means it’s not part of your estate.
As you may know, you can give $14,000 each to any number of people every year with no gift taxes. Further, that number is doubled if you’re married and your spouse gifts to the same people. The recipient is usually not facing any kind of tax and she also does not have to report the gift to the IRS. By the way, you can also make payments directly to hospitals, medical providers, colleges or other educational institutions. Again, you can do this tax free.
Gifts Above $14,000
So what happens if your gift exceeds $14,000 to any person during the course of the year? You’ll need to report this on your taxes; specifically, you’ll need to report it on IRS Form 709, “Gift Tax Return”. Also, if you’re married, you must file Form 709, even when no taxable gift is incurred.
For taxable gifts, donors have an aggregate lifetime exemption prior to any out of pocket gift taxes are due. The ways the laws are written now, you can give away up to $5.34 million during your lifetime—over and above the annual $14,000 exclusion and any payments you make directly to educational or medical providers on behalf of another—and still avoid gift tax. One important point: the unified credit means that the exemption you use for gifting will simultaneously reduce the amount you can use for the estate tax. The $5.34 million exemption applies to gift and estate taxes combined. Your estate planning lawyer will help guide you through those compliance regulations.
The truth is, it’s a fine strategy to take advantage of the annual $14,000 exclusion while making direct payments to medical or educational providers. If your estate is especially large, you might want to consider making lifetime gifts that utilize the lifetime exemption. Again, these details can be worked out with your financial advisor and your estate planning attorney.
Believe it or not, there are times when clients have incorporated these strategies only to realize they’d not planned for their own needs. These are irrevocable, so once it’s done, it’s done. To learn more about the many benefits of lifetime gifting, we invite you contact our office today. We’ll guide you through the maze of laws and help you determine the best strategies for your needs.