If you think your estate might owe estate taxes, then you are probably considering gifting. In the context of Estate Planning, “gifting” refers to giving your estate assets away, while still alive. There are a few reasons why someone may want to do this, though the primary purpose is to avoid or reduce any potential estate tax upon death.
Estate taxes are paid by the deceased’s estate, though many estates will never actually pay this tax. As of 2021, the IRS exempts estates valued at less than $11.7 million per person and $23.4 million per married couple.
Annual Exclusion Gifts
Tax laws currently allow you to make tax-free gifts (up to a certain amount) that don’t count against your gift and estate tax exemption amount.
In 2021, the annual exclusion amount is $15,000 per individual or $30,000 for married couples. These can be gifts of cash or property. Just remember that no one individual may receive more than $15,000 in one year. Anything over the annual exclusion of $15,000 is taxable and you must file a gift tax return for that extra amount.
The annual exclusion goes up by about $1,000 every few years, to account for inflation and the rising cost of living.
Married Couples Gifts to Others
Many spouses take advantage of the annual exclusion amount of $30,000 in providing for their children. For example, if mom and dad want to help their son pay for a wedding, they can give him a total of $30,000, tax-free. After one calendar year has passed, they may want to gift him another $30,000, tax-free, for a down payment on a house.
Married Couples Gifts to Each Other
All gifts made to a spouse are tax-free, as long as the receiving spouse is a U.S. Citizen.
The annual exclusion is not based on the date of gifting, but rather on the calendar year. Therefore, if you wish to give a gift larger than the $15,000 limit, you can avoid gift taxes by spreading out the gift over multiple payments.
Cash Example: Grandma wishes to give her granddaughter a gift of $20,000 for Christmas. Grandma can give her $10,000 in December, then wait until January to give the other $10,000. Both gifts will be tax-free. Remember though, that Grandma could only give her granddaughter another $5,000 in the new year, before she would have to start paying gift taxes.
Breaking up a gift of non-cash property, like stocks or even real property, is also possible.
Hire an Attorney
Gifting can be confusing, as there are a lot of dos and don’ts. To learn whether gifting is something you should consider implementing with your estate plan, consult with an estate planning lawyer, our attorney has the estate planning, probate, and tax knowledge and experience to help you make the best decision for you and your family.