Should I Give Money to my Heirs Before I Die?

Our clients consider making lifetime gifts to their children or other beneficiaries for a variety of reasons. They may want to reduce the potential for estate taxes. They may want to protect assets from creditors. Some want to reduce their wealth to get government benefits if they need nursing home care. Others want to be sure their beneficiaries receive an inheritance.

Regardless of the goal of making lifetime gifts to loved ones, there are tax rules to keep in mind.

Will My Beneficiary Have to Pay Taxes on a Gift?

Money received as a gift is not income to the recipient. If you give away enough money during your lifetime, you will have to pay a federal Gift Tax. Not many people have to pay gift tax today. A single person can give away up to $11.58 million before any gift tax is due. A married couple in which the spouses split gifts can give away up to $23.16 million before paying gift taxes. Unless the law changes, in 2026 the lifetime exemption for gift taxes will be $5 million for individuals and $10 million for married couples, adjusted for inflation. The gift tax exemption and estate tax exemption are combined, so giving away $11.58 million during lifetime means that any additional assets you have at your death will be subject to estate taxes.

Are all gift subject to federal gift taxes?

There are three very useful exclusions to federal gift taxes. You do not have to report the following gifts to the IRS:

• Gifts of less than $15,000 (in 2020) per person per year. Married couples who split gifts for tax purposes can give up to $30,000 per person per year without reporting the gift to the IRS. So a Fairfax, Virginia couple with four children can give away up to $120,000 per year to their children without using any of their lifetime gift tax exemption.
• Payment for education and medical expenses. There is no annual limit on the amount you can pay to a medical or educational institution for services to another person. The payments must be made directly to the institution. So, a Vienna woman can pay her grandchild’s college tuition without reporting the gift to the IRS.
• Charitable giving. Gifts to tax-exempt charities are not subject to gift taxes. There is more to charitable giving than clicking “give now” on the website. You can set up a donor advised investment account or use charitable trusts to benefit your heirs and your favorite causes.

What Else Do I Need to Know?

A lot. The estate planning attorneys at HALE BALL MURPHY, PLC PLC can explain how these general rules apply to your situation so you can make educated decisions. Business interests need special consideration when they are gifted.