Gifts
Lifetime gifts are the most common way to reduce the eventual estate tax. Gifts may be of cash, securities, real estate, art... pretty much any asset. We are tempted by hearsay to think the limit is $17,000 per giver per recipient, but there is much more freedom than that. For Washington State estate tax reduction, there is no limit -- lifetime gifts aren't considered in the eventual State estate tax. For Federal purposes, gifts can affect the eventual estate tax. There is a seeming $17,000 limit but that only means that, if one exceeds it, one must file a gift tax return showing that a portion of one's roughly $12.92 million Federal estate tax exemption has been used. This isn't an issue for anyone with an estate well below that level (twice that level for couples with properly structured Wills or Living Trust).
Insights
How much money can I give away without being taxed?
The IRS allows you to give up to $15,000 per person per year without having to report it. That means, for example, that a married couple could give a married child up to $60,000 per year: Each parent spouse can give each child spouse up to $15,000. But note that even if you give more than $15,000 to one person in one year, it still is not likely to ever trigger a tax! You must report the amount that you give that’s greater than $15,000 to the IRS. You are not taxed until your total reportable gifts exceed your lifetime exemption, which currently is $11.4 million per person. And note that those lifetime gifts aren’t counted at all in calculation of Washington State estate taxes.
If I give money to someone, do they have to report it on their income tax return?
No. Gifts are not income, so they are not taxed to the recipient. If a gift actually is compensation in disguise, though, it will be taxed as income.
Should I give property to my kids?
Don’t rush to give away property to your children to avoid probate or taxes. It might be more advantageous for them to inherit it from you. That’s because the capital gains tax on inherited property usually is significantly less. People who inherit property receive a new income tax basis equal to the property’s value on the date of death (this is called a “step-up in basis”). The result is that when the heir eventually sells the property, the heir only must pay capital gains taxes on the value the property increases after they inherit it. If you gift the property during your lifetime, on the other hand, your children take it subject to your income tax basis, which is the price you paid when you bought it.
If, despite this, you do decide to give away property during your life, note that you should complete a federal gift tax return if the property is valued at more than $15,000.
How can I protect my gift or bequest to my children?
Parents often are hesitant to leave assets to a child if they are worried the child may someday lose half those assets in a divorce. A good solution is for parents to give those gifts in a trust that is clearly the separate property of the child. The child can even be trustee of the trust, if the parents believe that he or she understands the importance of keeping separate property separate.
What is the $15,000 annual gift tax exclusion?
It’s the amount you may give directly to any person without any gift or estate tax consequence.
Do gifts to trusts qualify for the annual exclusion?
Not unless the trust is drafted a certain way.
Do I pay gift tax if I give more than $15,000 per person?
No; you use some of your Federal estate exemption (until you give more than the amount of that exemption that is now more than $11 million).
What kinds of assets can I give?
Almost any kind of asset, but some assets are better to give than others.
Is there a Washington State gift tax?
No, so even deathbed gifts can reduce or avoid State estate tax. However, in this situation one should only make gifts of assets with high income tax basis.
