Inheritance and Gift Taxes

Winston Churchill once said, ‘We make a living by what we get, but we make a life by what we give.’  If fortune has smiled on you and you are a generous person, you might consider ‘gifting’ some of your assets to another individual.   Whether that person is your child who wants to take flying lessons, your friend who wants to install a Koi fish pond in their backyard, or a struggling single mother who you heard about through your church, you need to be aware of the IRS rules pertaining to inheritance and gift taxes.

The gift tax was created to prevent wealthy individuals from ‘giving away’ their money to avoid being subject to estate or inheritance taxes.  It allows the federal government to put a cap on the amount of money a person can ‘gift’ to an individual by establishing yearly and lifetime limits.  The gift tax is assessed on the donor of the gift, based on the value of the assets that were given away. Inheritance tax, on the other hand, is paid by the beneficiary when he/she receives assets from a deceased person (if the inheritance tax has not already been paid by the executor of the estate).

The IRS allows you to ‘gift’ up to $13,000 annually per person (to any number of individuals) without owing any gift tax ? as long as you do not exceed the $1,000,000 lifetime maximum.  If you are married, you and your spouse can each give a gift of $13,000 per year (or $1,000,000 over your lifetime) and not be subjected to the tax.

For example, say you want to give your child $26,000 so that he can buy a car.  You and your spouse would each have to gift $13,000 in order to qualify for the gift tax exemption.  However, if you each make a $15,000 gift to the child, the amount that exceeds your annual limit of $13,000 ($2,000 per person in this case) will be applied towards your $1,000,000 lifetime maximum.

Now suppose you wanted to give your child $13,000 a year for the next 10 or 20 years ? that would be an effective way to give them money and reduce the amount of inheritance tax that your child would have to pay on a lump sum inheritance upon your passing.

It is not uncommon for people who have amassed a large estate to begin gifting away a portion of their assets to their children (or to other beneficiaries) each year. This allows them to share their generosity, experience the appreciation of assets, and reduce the amount of inheritance tax that may be due (had they waited until death to transfer their assets).

In general, according to the IRS, the following items are not considered to be ‘gifts:’

• Gifts that are less than or equal to the annual exclusion for the calendar year
• Tuition or medical expenses you pay on behalf of someone (these are     accounted for under the educational and medical exclusions on your tax form)
• Gifts made to your spouse
• Contributions made to a political organization
• Contributions to a qualifying charitable organization

The rules pertaining to gift, estate, and inheritance tax laws can be confusing and complex. It’s highly recommended that you consult a qualified tax professional or estate lawyer for additional advice.

---