Senior woman contemplating

Should you give your heirs gifts now? Or wait? Ultimately, there’s no “right” answer. This is a personal choice.

Scenario: You have decided to make gifts to your heirs, but you are stuck on the timeline of it all. Will you give now while you are still here? Or will you plan to leave the gifts after you pass?

The Motley Fool recently offered some help on this subject by comparing the gift tax and the estate tax in a May article titled “Should You Make Gifts to Your Heirs Now, or Should You Wait?

  • Gift Tax. The gift tax is imposed by the federal government on any transfer of property to an individual without any compensation in return. “Property” includes tangible property, such as art or furniture, and intangible gifts like stocks and cash.
  • Unified Gift and Estate Tax Credit. Under 2014 laws, you are exempt from gift tax on lifetime donations up to $5.34 million. Once you pass that lifetime amount, however, your gifts and donations may be subject to taxes up to 40%.
  • Annual Exclusion. In any one year, you can also give a tax-free gift up to $14,000 per recipient without using any of the lifetime exclusion—this is known as the “annual exclusion.” However, if you give more than the annual exclusion amount to any one recipient in any particular year, most people are eligible to use the unified credit so that the gift counts against your estate. The article shows this in an example: if you give $15,000 in 2014, $14,000 is eligible for the annual exclusion and the remaining $1,000 is applied against your lifetime exemption, which also reduces the exemption for your estate when you die by the same amount.
  • Estate Tax. The estate tax is imposed by the federal government on any transfer of property (tangible or intangible) by your estate after you have passed away. It is calculated by figuring out your “gross estate” (all assets including real estate, cash and securities, business interests, etc.) and subtracting any deductions you may qualify for (such as funeral expenses and some charitable contributions). The net amount after these calculations is then added to any taxable gifts you have given that have used up your unified credit to generate your taxable amount.

The article also provides a thorough discussion of the pros and cons of gifting now as opposed to later. Take a look and speak to your estate planning attorney to make sure your plan is set up to maximize these exceptions and exclusions.

Reference: The Motley Fool (May 18, 2014) “Should You Make Gifts to Your Heirs Now, or Should You Wait?

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.