Ways to Use Gifting in Your Estate Planning
Tragically, 95% of the people who died as a result of COVID-19 were seniors, and many didn’t have a chance to properly establish their estates. Unfortunately, thanks to COVID-19, the need to engage in appropriate financial planning has accelerated. Fortunately, a competent estate planning lawyer can help you prepare your estate and take advantage of appropriate gifting techniques.
Direct Annual Gifts
Current tax laws allow you to give annual gifts without the receiver incurring any tax repercussions. Under normal circumstances, there is a gift tax. However, if the gift is less than $14,000, the tax doesn’t apply. This can be given to unlimited recipients on an annual basis. In other words, you can give up to $14,000 to as many heirs as you choose without them having to pay tax on the gift. The threshold for the tax is indexed to inflation, so it rises every year. Additionally, married couples count as two separate individuals for tax purposes. As such, you could give a married couple up to $28,000 without incurring the gift tax.
Keep in mind this tax applies only at the federal level. Different states may have different types of gift taxes, so while you might not have to pay it at the federal level, you still might have to pay it at the state level. You should check with a financial planner or estate lawyer for specific information pertaining to your state.
While there are limits on how much money can be given as a financial gift, there are other types of gifts you can use to avoid paying estate taxes. The two most common types of alternative gifts are educational and medical expenses.
Educational expenses are direct payments to a school or other educational institution. These payments must cover expenses that are directly related to your education. School supplies and equipment don’t count.
Medical expenses are paid directly to a medical provider and must be related to medical expenses or travel for medical care. Long-term care payments are limited. Furthermore, not all types of healthcare payments are included. For example, cosmetic surgery would not qualify for gift exemption.
Establishment of Trusts
Trusts are financial mechanisms that allow you to give a trustee the right to hold your property or financial assets. The trustee will manage those assets until such time that the intended recipient meets the qualifications that enable them to access it. These qualifications can be anything but are most commonly age.
There are many types of trusts, and each trust has varying benefits and drawbacks. However, one of the most common benefits of a trust is that it can be used to reduce estate taxes. Not all trusts can be utilized for these purposes. Irrevocable trusts are the most common type of trust when it comes to avoiding estate taxes.
Trusts are complicated financial and legal vehicles that must be set up with the assistance of an attorney. As such, they’re not for everyone, and the legal fees associated with these trusts may be significant.
Make Sure to Check for Tax Law Changes
The COVID-19 pandemic has obviously had a massive impact on our financial system as a whole. In response, federal, state, and local governments have made numerous legal and financial changes to a variety of taxes. Many tax collections were delayed, and this may be the case for the foreseeable future. You should take this opportunity to ensure your estate is prepared for these updates. Also, make sure any gift-giving strategy is properly aligned with the current tax system.
Gifting and estate planning go hand in hand. However, in most places, it’s not something you’re expected to handle on your own. If you’re looking for an estate planning lawyer, contact the Knee Law Firm. We can use our decades of experience to assist you in the proper planning of your estate. We’ll use our knowledge to maximize your assets and minimize the taxes your survivors will have to pay.