You Can’t Take It With You; Why Gifting Makes Sense

You Can’t Take It With You; Why Gifting Makes Sense

Gifting is a common estate planning strategy that gives  a portion of assets to loved ones and charitable organizations. Gifting not only expresses love and affection for family and friends, but gifts serve other purposes as well. Gifts allow family members the opportunity to participate in the management of a family business, pay for medical costs, and college tuition.

Additionally, gifts will reduce the size of the estate, and simplify the probate process. Lifetime or inter vivos gifts should be exercised with great care. On the one hand, you don’t want to give to the extent that you lose the ability to support yourself. On the other, you don’t want a tax penalty for being too generous.  Sometimes, a gift can do more harm than good, especially when factoring in carry-over basis versus stepped-up basis of certain types of property. This article paints gifting with a very broad brush. You should consult a professional before acting on any information  discussed below.

WHAT’S A GIFT?

A gift is a transfer any item of value; when the person making the gift does not receive anything of value in exchange. Generally, no gift is complete until the transfer is complete. A person, must part with the property as well as control of it. Sometimes a gift can be made by parting with a portion of the property, depending on the nature of the property being gifted. Transferring title is usually simplest and most common way to make a gift.

GIFT TAXES

A person making a gift, is liable for the gift tax. If a donor fails to pay the gift tax, the then the donee is liable for the tax.  If a gift produces income, such as stocks, taxes are paid on income received from the date of the gift.

Not all gifts are taxed, however. Currently, the federal annual exclusion for gifts Gifting during your lifetime makes sense in many circumstances.is $14,000 for individuals, and $28,000 for married couples. These amounts are cumulative per calendar year. If less than these amounts are made to an individual they don’t need to be reported to the IRS.  If a gift is made in excess of the amounts above, then it needs to be reported and taxes must be paid. In addition, if property is titled solely by one spouse, the non-gifting spouse can elect to split the gift and be taxed equally. This is useful if the gift exceeds the $14,000 individual amount, but doesn’t reach the $28,000 threshold.

UNLIMITED GIFTING

Some gifts can be made in an  unlimited amount; gifts made to education institutions for tuition, and paid directly to the school; directly to a health care provider; to charitable organizations , as long as it’s a 501(c)(3) charity, and the gift is made directly to the organization.

LIFE INSURANCE

Life insurance death benefits are added to the gross estate, when the estate is the beneficiary, or the insured owns the policy at the time of death.

If you transfer your life insurance policy to a beneficiary, this transaction will be regarded as a gift. If it has a value of more than $14,000 gift taxes will be assessed. The gift tax however, is paid when the insured dies.

A life insurance policy must be gifted completely. There must be no “incidents of ownership”. Examples of incidents of ownership are, the right to borrow on or cash in the policy, or to change beneficiaries. Additionally, if you give your policy to a someone, and later change your mind, there is nothing you can do. This is a permanent decision.

On the up side, a benefit of making a gift of a life insurance policy is the gift tax that the donee will pay, will be far less than the estate tax if the policy remained in the estate.  This is because death benefit proceeds are always considerably more than the value of the policy while the insured is alive. Contact your insurance company to find out the present value of your life insurance policy for gift tax purposes.

Moreover, when someone dies within three years of the policy transfer, the death benefit becomes part of the gross estate.

Keep in mind, gifting a life insurance policy is a nuanced estate planning strategy. which should be made with great care. Especially since most estates don’t meet the federal threshold for taxes, and Colorado doesn’t have estate taxes.

To Sum Up,

Gifting is a great way to show your love and affection to family members and people you care about. I remember to this day, when my grandmother gave me her engagement ring. When I proposed to my wife, I had something precious and dear to me, to give to her. Since you can’t take it with you, it makes sense to see the joy and appreciation in the eyes and faces of those you love.

If you’d like more information about estate planning and gifting, please contact my office. Phone: (303) 900-2529 or email me at paul@pmillerlawoffice.com for a free consultation.

This article is for educational purposes only, and does not constitute legal advice about your case or situation. There may be exceptions to the information outlined above. Please consult an attorney if you have specific questions about your estate plan. 

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