When you decide what gifts to leave to your heirs, you will have to delineate a timeline of when they receive their gifts. The decision of when to give gifts solely depends on personal preference, but keep in mind the rules of gift tax and estate tax.
Gift tax is the tax enforced by the federal government on any transfer of property to an individual without any compensation in return – in this sense “property” refers to any tangible and intangible property. Currently, you are exempt from gift tax on lifetime donations up to $5.34 million. Once your donations go over that amount, they can be subject to taxes up to 40%.
It’s essential to note that this is a lifetime exemption – in other words this is your cap over your lifespan. The $5.34 million lifetime exemption is a renowned figure in estate planning that’s based on the unified gift and estate tax credit.
In any given year, you can also give a tax-free gift of up to $14,000 per recipient without dipping into the basic exclusion – also known as the annual exclusion. However, the unified credit – the federal gift tax and estate tax combined into one tax system – makes it a little more complicated. If you give more than the annual exclusion amount to any one recipient in any given year, most people are qualified to use the unified credit so that the gift counts against your estate. For instance, 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. It also reduces the exemption for your estate when you pass away by the same amount.
Estate tax is the tax enforced by the federal government on any transfer of property – tangible or intangible – by your estate after you have passed away. Your estate tax is calculated by subtracting any deductions you may be eligible for by your gross estate. The net amount is then added to any taxable gifts you have given that have used up your unified credit to produce your taxable amount.
Giving heirs the money now:
Waiting until you pass away: