Everything You Should Know About Gifting Assets During Your Lifetime
When a person dies, it’s common for their estate to go through the probate process, which may require certain assets to be taxed. Keep in mind that around 55% of all Americans haven’t made a will, which increases the possibility that estate assets will be taxed. When you’re making an estate plan, there are several strategies you can use to gift some of your assets while you’re alive.
Use the Gift Tax Exclusion
At the moment, it’s possible to provide gifts of $15,000 or less to any number of people in a given year, none of which will need to be taxed. The recipient shouldn’t owe any taxes and won’t be required to report your gift. In the event that the gift is higher than the $15,000 limit, it will need to be reported on IRS Form 709, which is a gift tax return.
When spouses are splitting gifts, these gifts must be reported on the aforementioned form even if they don’t exceed $15,000. Before you gift any of your assets, it’s important to understand that anything above $15,000 in one year will effectively reduce your lifetime estate and gift tax exemption, which is the next strategy in this guide.
Use the Lifetime Estate and Gift Tax Exemption
The estate and gift tax exemption is considered to be a lifetime exemption as opposed to an annual exemption. This exemption increased by a considerable amount after the Tax Cuts and Jobs Act was passed. If estates or gifts exceed the exemption amount, the highest percentage of tax that can be assessed against the estate or any gifts that were given is 40%.
Before 2017, the estate and gift exemption was right around $5.49 million. From now until 2025, this exemption is $11.7 million. However, the exemption applies to your estate as well as all assets that you gift, which means that the gifting exemption you use will alter how much can be used for your total estate tax. This is considered by the IRS to be a unified credit.
What this exemption means is that you can gift $11.7 million during your lifetime without needing to pay gifting taxes. It’s also possible to combine your exemption with the one that your spouse has in order to obtain a $23.4 million exemption. As mentioned previously, the $11.7 million exemption only lasts until 2025, after which the exemption will revert to what it was before 2017. If you want to lock in the $11.7 million exemption now, you may want to start gifting your assets immediately instead of waiting until a later date.
Place Your Assets in an Irrevocable Trust
Another strategy you can use to gift assets without needing to worry about them being taxed is to place them in a trust. In fact, this strategy can be even more effective than the other ones in this guide. When a child or teenager is gifted a substantial sum of money, they will likely be completely unaware of how to manage this money.
If you want to make sure that your assets are somewhat protected even after you gift them, consider placing them in an irrevocable trust with your child as the beneficiary. By using this strategy, you have complete control over how the assets within the trust are distributed and invested. One of the rules associated with the trust you create could be that your child will only receive these assets once they graduate from college.
There are several methods you can use when setting up a trust, which is why you should speak with our New Jersey estate planning lawyer before doing so. We’ll help you understand what your options are and which one best fits your situation. Keep in mind that assets that are placed into an irrevocable trust aren’t considered to be part of the estate’s taxable assets.
Restrictions that You Should Take Into Account
While gifting assets is a fairly straightforward process, there are some restrictions and caveats to be aware of when creating an estate plan. While lifetime gifting can be highly advantageous when you want to make sure that beneficiaries receive your assets without being taxed, it’s important that you keep enough of your assets to live on.
If you want a gift to be considered legitimate, it’s essential that the gift occurs via an irrevocable transfer. The aforementioned guidelines about gifting assets only center around federal tax regulations. There’s a chance that state tax regulations will treat gifting assets differently. Our estate planning lawyer can help you understand how state tax guidelines will affect your estate.
If you’re thinking about gifting assets and you want to be certain that you can do so without the beneficiary needing to pay taxes, call our New Jersey estate planning lawyer today at (201) 996-1200 to set up a consultation.