The Effect on Taxes of a Lifetime of Giving

What are the tax implications of giving gifts to family members during your lifetime?

If you have substantial assets, it is natural to want to gift your family members from time to time, on special occasions, or to subsidize a particular purchase, trip, start-up business or educational venture. Nonetheless, it is important to be savvy about the tax implications of giving such gifts.

How do lifetime gifts affect your taxes?

Gifts given during your lifetime can affect your taxes on three levels:

  • Your individual income taxes
  • Your individual estate and gift taxes
  • Capital gains taxes potentially paid by the recipient

Current federal law considers estate and gift taxes in combination. You are allowed a cumulative $5.45 million exemption ($10.9 million if you're married) from estate and gift taxes from your lifetime assets. If the gifts you give during your lifetime, or at your death, exceed that amount, the excess is taxed at a rate of 40 percent.

Current law, however, permits you to make gifts to an individual of up to $14,000 ($28,000 if you're married) during a single year without those amounts being counted toward the $5.45 million exemption.   These smaller gifts, known as annual exclusion gifts, are neither taxable to you as a donor, nor to your donee as taxable income. If the person you give this money to invests it, however, its earnings are taxable.

What Is the Best Action to Take Relative to Gift-Giving in Terms of Estate Planning

Although many people with this kind of wealth look to gift greater amounts during their lifetimes as a means to minimize estate taxes, this is not easily possible. This is because if you make such a gift during a single year, you will be required to file a gift tax return and if the amount you give is over $14,000 (or $28,000) it will be counted toward your exemption.

What you can do legally is make certain transfers directly to educational and medical institutions in unlimited amounts since these transfers are not regards as gifts by the IRS code. A typical estate planning goal is to make transfers during your lifetime which have the potential to appreciate, while removing them from your estate for tax purposes.

If you have highly appreciated assets, you should consider whether making lifetime gifts of property makes sense. In most cases, there will be a greater tax benefit to your heirs if you hold your assets until death, since now most individual's estates are not likely to be subject to estate tax. If your beneficiary is likely to sell the highly appreciated asset, he or she will incur a large capital gains tax. If, on the other hand, you give the highly appreciated asset away at your death, the beneficiary will not likely have a capital gains tax to pay.

The tax complications inherent in gift-giving make it abundantly clear why it is essential to have a high-power estate-planning attorney at your side as you make choices that will affect your loved ones not only in the present but well into their future and the futures of their offspring.

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