The Gift Tax and the Estate

As people gather assets over the course of their life, their thoughts are often consumed with their financial issues, retirement planning, and what to do with their estate after they pass away. Some people may assume that their estate is simply going to be passed down to their loved ones; however, this is not so easy to guarantee and it is not always the case. Aside from issues of probate that should be considered, there is also an estate tax that many people could have to pay on the value of their estate and, for larger estates, this tax could potentially be fifty percent (or more) of the total value of the estate. Careful planning is required to preserve as much of the estate as possible for their loved ones.

Because the estate tax is triggered upon someone's passing, it can be helpful to reduce the value of the estate prior to someone's death. For example, estate owners could give some of the estate’s value away to charity or gift some of the estate's worth to their beneficiaries before they pass away. If this was the plan for the estate in the first place, the beneficiaries are just receiving some of the value at an earlier date. Giving away a portion of the estate to charity or an organization is certainly a good idea for someone interested in philanthropy or doing a good deed. In this fashion, when someone passes away, the estate will be smaller, reducing the amount owed in estate tax.

While this sounds like a great idea, people should remember that there is a gift tax. If someone receives a financial gift, they could have to pay a percentage of that gift in taxes at the end of the fiscal year. Someone who receives a gift of over 14,000 dollars will have to pay a gift tax on every dollar amount over the 14,000 dollar limit. This could prevent people from significantly cutting down the value of their estate. It is always a good idea to speak with a tax professional to confirm that the limit for a gift tax is 14,000 dollars. While that is the current limit, the IRS Code is always changing, and someone’s tax planning may need to adjust depending on the gift tax limit at the time.

While this may sound like a road block, there are certain strategies people can use. Remember that the gift tax is applied on a per-person basis. This means that an estate with multiple beneficiaries can give away a gift to each beneficiary, helping to reduce the estate's value further. In addition, the estate tax is applied on an annual basis. People can receive multiple gifts of up to 14,000 dollars each year if the gifts are spread out over multiple years. An owner of an estate can take advantage and reduce his or her estate’s value significantly by gifting assets totaling under 14,000 dollars every year over several years. Take advantage of this to reduce the estate's value prior to death to minimize the amount of estate tax owed.

It is always recommended to consult with an experienced and knowledgeable tax attorney and estate planning attorney in order to protect your assets, as well as those of your family. Such a professional can guide someone in the right direction and make sure that an estate is protected and can be passed down to future generations without having to reduce the value of the estate by a significant amount. Absent such guidance, someone risks losing the assets they worked so hard to earn and maintain and which they planned to pass to future generations of their family.

** Note: This article is not meant to be taken as any form of legal advice. This is purely informational. For questions please contact your attorney, or schedule an appointment with Vilar Law directly.

Article updated October 7, 2020.