When preparing your estate plan, you always must consider tax consequences and where they will come into play. Regardless of the state in which you reside, you will likely be subject to US Federal Gift Tax if you choose to gift property or assets to anyone. The gift tax must be paid by the donor, not the person receiving the gift. However, the beneficiary has been known to be responsible for the tax liability by the Internal Revenue Service if the donor fails to pay the gift tax. Many people may be under the assumption that they are avoiding tax implications when they gift property or money to individuals before their time of death. This is not accurate. Now or later, the Internal Revenue Service will receive their due taxes.
Reducing Liability
Tax liability can be reduced through certain exemptions and exclusions. On occasion, the tax liability can be eliminated. Yearly exclusions, and lifetime exemptions from the gift tax can be researched by reviewing the Internal Revenue Code. Of course, if all of this is hard to understand, you can always seek the counsel of an estate planning professional or tax law attorney.
Gift Tax
As a generous individual, you may be asking “What is a Gift Tax? Why does it have to be so complicated?” To completely understand the tax, we must first discuss the terms associated with it. What exactly is a gift? The Internal Revenue Service defines a gift as anything in which you do not receive payment for in return. With that said, it must be a “full consideration” of value that you do not receive in return. The recipient is receiving something of value from you as a gift of generosity. Individuals may also try to avoid a gift tax by “selling property for $1”. There are just as many implications with this generous act, as well, which could include passing the tax liability onto to the recipient of the gift.
Exceptions
There are exceptions. For example, you can give your spouse as much as you would like without being subject to a gift tax. You can also provide money for education or healthcare needs if you pay the institutions directly without being taxed. However, if you choose to give someone money to attend college, you will be taxed because you are not paying the institution in which they are enrolled. In this scenario, you may also want to consider specific educational savings plans. Lastly, you can give to certain charitable non-profit groups and some political organizations without having tax implications.
When drafting your estate plan, it is always best to work with an estate planning professional. An estate planning professional can help you to determine what is most advantageous for your estate and your beneficiaries regarding tax implications. You may have the best intentions as a generous individual. It is always best to fully understand how a monetary or real property gift could affect your tax liability, as well as the recipient’s. Discussing all the implications with an estate planning attorney can help you to determine the best options for all involved.
