Paul Tarins, RICP®,WMCP®,CSRIC™
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 $15,000 per individual receiver fall under a gift tax exemption.1 For gifts of $15,000 or more per individual a year, the giver will be required to file a gift tax return Form 709. Only the amount above the $15,000 limit will need to be reported. For example, if someone gifts $25,000 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 $5.49 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.
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.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.