We currently have in effect something called a “Unified” estate and gift taxation system. What this means for the average American is that the lifetime limits for gifting of personal property is tied in directly with your estate exemption limits. In plain English: You can leave behind personal property when you pass, and it won’t be taxed if it’s under a certain amount…but the IRS will subtract the value of gifting that you’ve done DURING your life from that exemption number. But don’t worry, there are ways around this if you know the rules and effectively plan out your gifting to heirs during your lifetime.
Let’s talk about the numbers.
Back in 1997, an individual could leave behind $600,000 in personal property to their loved ones without any tax concerns whatsoever. Now fast forward to 2016 and that number is now $5.45 million dollars! If you’re married, that means you and your spouse have a lifetime estate and gifting limit of 10.9 million dollars. That’s a lot of money. However, you have to remember that since gifting and estate are “unified”, those numbers are all-inclusive of lifetime gifts and your estate when you pass. Are there ways to work around this? The answer is yes!
Gifting and You: How to Make the IRS Happy
Want to leave behind the maximum to heirs and loved ones? Then start a gifting program during life. There is currently a $14,000 annual gift exclusion per person, but here’s the catch:you can give up to $14,000 per year to an unlimited number of recipients, and if you’re married, you and your spouse can make a joint gift of $28,000 to an unlimited number of recipients. I’m not a CPA or attorney, but I’d HIGHLY recommend that you document such gifts and include the documentation in your taxes when you file for the year.
Let’s do a couple of examples:
Example #1: Mr. & Mrs. Thomas own a mid-sized manufacturing company. They both turn 60 and decide they are ready to retire.They sell their company, taking home $15 million dollars after taxes. They decide to live off of the interest for the rest of their lives, so their estate does not grow. Assuming they did no gifting during life, the first $10.9 million would be exempt from estate tax, and the remaining $4.1 million would be taxable under current tax law. At a 40% bracket, that means they are looking at estate taxes of $1,640,000 owed to the IRS!
Example #2: As above, Mr. & Mrs. Thomas sell their company, but instead of distributing dollars upon death, they decide to take advantage of the annual gift exclusion for their two adult children Heath and Jennifer. They make annual gifts of $28,000 to each child for the next 25 years, transferring a total of $1.4 million during their lifetime. Upon their passing, the first $10.9 million would still be excluded from estate taxation because the couple did not exceed the annual gifting limits of $28,000 jointly per recipient. In this example, only $2.7 million would be subject to estate tax. At a 40% bracket, the means they are looking at estate taxes of $1,080,000 owed.
In the above examples, a lifetime gifting program saved the Thomas family almost $500,000 in extra estate taxes, just because they took advantage of their annual gifting allowances! I say this a lot, but when it comes to money and taxes, you have to know the rules before you play or you’re going to pay for it big time. Consult your attorney and tax professional, as each case is unique.
Key Take Away: The best time to start leaving behind property for heirs is during life. All of the estate planning in the world will not excuse you from all estate taxation.
Written by: Kyle A. Davis, ChFC®
Kyle A. Davis is a Chartered Financial Consultant® and president of Integrity American Group, LLC. He is a Florida native and an advocate for financial literacy and practical money education. When not assisting clients with their retirement planning, he creates educational videos on financial wellness and offers free resources on his personal finance YouTube channel HERE
Last Updated on August 9, 2023 by The Orlando Law Group