There are several non-tax advantages of making lifetime gifts. One is that you’re able to see the recipient or “donee” enjoy your gift. It might give you satisfaction to help your children achieve financial independence or have fewer financial concerns.
WMUR’s recent article, “Money Matters: Lifetime non-charitable giving,” explains that lifetime giving means you dictate who gets your property. Remember, if you die without a will, the intestacy laws of the state will dictate who gets what. With a will and trust, you can decide how you want your property distributed after your death.
At your death, your property may go through probate if you do not have a trust. Lifetime giving will help reduce probate and administration costs, since lifetime gifts are typically not included in your probate estate at death. Unlike probate, lifetime gifts are private.
Let’s discuss some of the tax advantages. First, a properly structured gifting program can save income and estate taxes. A gift isn’t taxable income to the donee, but any income earned by the gift property or capital gain subsequent to the gift usually is taxable. The donor must pay state and/or federal transfer taxes on the gift. There may be state gift tax, state generation-skipping transfer tax, federal gift and estate taxes, as well as federal generation-skipping transfer (GST) tax. The disadvantage to lifetime gifts is that the donee takes the basis of the property in the hands in the donor which could result in capital gains taxes if the donee sells the gifted item.
A big reason for lifetime giving is to remove appreciating assets from your estate (i.e., one that’s expected to increase in value over time). If you give the asset away, any future appreciation in value is removed from your estate. The taxes today may be significantly less than what they would be in the future, after the asset’s value has increased. Note that lifetime giving results in the carryover of your basis in the property to the donee. If the asset is left to the donee at your death, it will usually receive a step-up in value to a new basis (usually the fair market value at the date of your death). Therefore, if the donee plans to sell the asset, she may have a smaller gain by inheriting it at your death, rather than as a gift during your life.
You can also give by paying tuition to an education institution or medical expenses to a medical care provider directly on behalf of the donee. These transfers are exempt from any federal gift and estate tax.
Remember that the federal annual gift tax exclusion lets you to give $15,000 (for the 2019 year) per donee to an unlimited number of donees, without any federal gift and estate tax or federal GST tax (it applies only to gifts of present interest).
Prior to making a gift, discuss your strategy with an estate planning attorney to be sure that it matches your estate plan goals.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: WMUR (April 18, 2019) “Money Matters: Lifetime non-charitable giving”