By Rick Fingerman, CFP
There are generally two ways you can make a gift: while alive (lifetime gifts) or after death (testamentary bequests).
Making gifts during your lifetime has certain benefits:
- Giving money to loved ones while alive allows you to see them enjoy the money or achieve a goal sooner, such as buying a house.
- Gifting while alive allows you to lower your taxable estate for estate tax purposes, which could mean more money going to your heirs rather than the government. Although most states will never reach the current federal estate tax threshold of $12.06 million, individual states may impose an estate tax as well. Hawaii, for example, has one of the highest estate taxes while New Hampshire has none.
- You can gift anyone you like up to $16,000 a year (the federal gift exclusion amount in 2022) without having to file a Form 709 gift tax form. Each spouse can gift an individual up to $16,000, doubling the gift.
- You can always gift more than $16,000 a year, however, a Form 709 is used to keep track of these lifetime gifts. No tax is due on the giver or receiver at the time of the gift, however, these gifts do get added back into your estate to calculate any federal estate tax you may owe upon your passing. At this time, only Connecticut and Minnesota impose state gift taxes above the annual limits.
If you’re making gifts while alive, cash from the bank isn’t your only option. You could gift shares of stock, for example, that have appreciated in value. You pay no capital gains tax (since you aren’t selling the shares) and the recipient of the gift would be liable for any capital gains tax due when they sell the shares. This type of gift works best with a giver in a high tax bracket and a recipient in a low tax bracket.
Careful consideration should be given before giving anything away. A gift is a gift and shouldn’t be expected to be returned. Gifting certain assets while alive could cause a large tax bill for the recipient as seen below.
Let’s say you bought your house 25 years ago for $100,000. It is now worth $1,000,000. If you give that house to your daughter now and she sells it the next day, she could be subject to capital gains taxes on $900,000. If instead you gave it to her at your death, she would receive what is called a step-up in basis and could sell the house that day and potentially pay no capital gains taxes.
Gifting assets at death do not help in lowering your taxes. Lifetime gifts can. However, we always want to make sure you are financially secure before making any gifts.
It is recommended you seek proper counsel before making gifts.
About the author: Rick Fingerman, CFP®
Rick is a founding and managing partner at Financial Planning Solutions, LLC. He has been helping individuals and families make sound financial decisions for over 30 years.