If you know that you want to leave behind money for your family members, is it better to leave the money as a gift while you are still living or as an inheritance after death? Each of these options have different tax consequences to be aware of before pursuing. We’ve gathered what you need to know in order to compare giving gifts versus inheritances to your beneficiaries.
Receiving Money as a Gift
When your beneficiaries receive money as a gift while you are still alive, they may not be required to pay taxes on the gift. Gifts up to $16,000 per individual receiver fall under a gift tax exemption.1 For gifts of $16,000 or more per individual a year, the giver will be required to file a gift tax return Form 709. Only the amount above the $16,000 limit will need to be reported. For example, if someone gifts $26,000 to another individual, only $10,000 will need to be reported on Form 709.
The receiver of the gifted amount will not be required to pay taxes on that amount, unless you were not able to pay the taxes before death.
To take advantage of this tax exemption, you can spread gifts out over multiple years while still alive. There is a combined federal lifetime gift and estate tax exclusion of $12.06 million.2
It’s also important to note that if you are giving a non-cash asset as a gift and your beneficiary, later on, decides to sell it, they may have some tax liability.
Partial Payment Gifts
There are certain instances where a receiver may pay for a portion of their gift, but not the full value. The most straightforward example may be of a child purchasing their parents' home for less than what the home is worth. If the home is worth $750,000, for example, but a child buys it for $500,000, the $250,000 difference between the purchase price and fair market value is considered a gift and would need to be reported accordingly.
Receiving an Inheritance
Each state has different laws and estate taxes when it comes to inheritances. A few states do have an inheritance tax, which is decided upon based on assets as they are being transferred to beneficiaries. Inheritance tax rates also change depending on the inheritor’s relationship to the giver. This means that spouses, children and siblings could have different inheritance tax rates.
The states that have inheritance taxes include:3
- New Jersey
In addition, if your beneficiary earns income off of the inheritance, that could increase their tax liability as well. An example of this would be earning dividends from inherited stocks.
Eleven states have only an estate tax: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Washington, D.C. does, as well. Estate taxes are levied on the value of a decedent's assets after debts have been paid. Maryland is the lone state that levies both an inheritance tax and an estate tax.4
Each situation is unique. It’s important to evaluate how much money you are looking to leave your loved ones, when you plan on giving them the assets and how much time you have to do so. These considerations, along with the tax consequences, can help you to decide if your beneficiaries would be better off with gifting or inheritance. Talk to a financial advisor for professional guidance as you continue to develop your estate plan.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.