Explore the Tax-Saving Strategy of Lifetime Giving

Explore the Tax-Saving Strategy of Lifetime Giving
NOVA Estate Lawyers – Leesburg, VA

Giving money or assets to your loved ones during your lifetime rather than having them wait until after your death to collect, is defined as lifetime giving. It is an estate-planning strategy used to reduce estate taxes by spreading gifts throughout your lifetime using certain exemptions created by the federal gift tax laws in the United States.

Gifting involves one person transferring cash, real estate, or assets to another while receiving nothing in return, rather like giving a birthday present to someone. With gifting, you may have the opportunity to help a loved one with needed cash, or you might make unlimited direct payments for their benefit to cover medical or education bills. Plus, you get to see their appreciation and the benefits of such a gift while you are still alive. To qualify, your gift must be a complete and irrevocable transfer.

For Tax Year 2017, the IRS allows a person to give up to $14,000 per year as a gift, without incurring a gift tax or having to report the gift being made on the giver’s tax return. For parents or spouses, the amount each parent can give becomes a “splitting gift” which allows a total gift to say a child of up to $28,000. The recipient also has no obligation to report the gift, and s/he does not owe taxes for the gift (unless it comes from a foreign source).

Amounts exceeding $14,000 given by a single person in a given year, however, require the giver (person making the gift; not the recipient of the gift) to file an IRS Gift Tax Form 709 with the federal government and pay any taxes owed (if applicable) for each dollar that exceeds the $14,000 limit.  Spouses splitting the gift must also file Form 709. However, there is no separate State Gift Tax for a person making a gift who resides in Virginia.  Gift tax is paid after your death.

Form 709 is merely a reporting mechanism for you to report in each calendar year that you are alive all gifts which then exceeded the annual excluded amount. This is because, under federal law, you have a Lifetime Exemption which is currently $5,430,000 (also known as the allowable amount). This Lifetime Exemption applies to the combined:  (1) value of all gifts made during your lifetime in any calendar year to any person which you reported on Form 709 as exceeding the then annual limit (now $14,000 but expected to increase in coming years); and (2) value of your entire estate passing to your beneficiaries at the time of your death, and any gifts provided from the estate over the yearly deduction are subtracted from that total.

A Helpful Example

For example, if you gift your daughter with $150,000 in a single year, the $14,000 is exempted, and you would need to file a gift tax return and report stating that you used $136,000 of your lifetime exemption of $5,430,000. It then reduces your lifetime exemption amount to $5,294,000. However, you could gift $14,000 per year without affecting your lifetime exemption. In addition, if you made additional payments directly to a medical or educational account, these amounts would also not count against your Lifetime Exemption.

Minimize Taxes

Upon your death, what remains of your Lifetime Exemption is subtracted from the total amount of your estate, thus relieving the estate tax burden upon your Estate and, in turn, those who inherit from your Estate. Using the annual gift exclusion, along with paying directly towards medical or educational accounts or providers of such services, may be a very useful way to preserve your lifetime exemption, and minimize taxes down the road.

Gift Tax vs. Inheritance/Estate Tax

Gift Tax and Inheritance or Estate Tax are often confused with one another. An estate tax takes into account everything you own plus your interests upon your death, and applies the estate tax on your right to transfer such property at your death. A Gift is money or property given during your lifetime and may or may not be subject to tax, depending upon your state. Virginia does not require a beneficiary living in Virginia to pay inheritance taxes, while nearby Maryland does. Virginia also does not have a Gift Tax.

Lifetime Gifting is an effective way to help your loved ones during your lifetime, and preserve your estate from possible future estate taxes, with the caveat to ensure that you retain enough money to support yourself throughout your lifetime.

Work with an Estate Planning Attorney

Working with an estate attorney, like Patricia Tichenor or Camellia Safi at the Law Office of Patricia E. Tichenor, P.L.L.C. can help you avoid making costly mistakes when setting up and implementing your estate plan. If you need an estate planning attorney in Northern Virginia, contact us today.