A carefully planned estate plan involves meeting not only one’s financial, but also one’s personal, objectives. By incorporating gifting in your estate plan, it is possible to minimize the need for probate administration, reduce the impact of estate, gift, and income taxes, and accelerate the enjoyment of the gifts by the recipient.
For those who pass away in the year 2013, $5,250,000.00 is the value of assets that are exempt for estate tax purposes in the decedent’s estate. Since the current estate tax exemption is set at this relatively high level, gifts made for the sole purpose of reducing the size of one’s estate for estate tax purposes would benefit only wealthier individuals.
Gifts made are not deductible for income tax purposes by the donor and are not taxable income to the donee. There is a federal gift tax, which is filed on IRS Form 709, and it is the obligation of the donor to file the return only if gifts are made to any individual during any calendar year in excess of the annual exclusion, which is $14,000.00 (or $28,000.00 for husband and wife jointly) for the year 2013. In the event that the gifts to any individual exceed that amount, then the amount in excess of the annual exclusion is deducted from the estate tax exemption available to the donor’s estate upon his death. There is no gift tax payable unless the donor makes taxable gifts in excess of the estate tax exemption.
As mentioned, the gift tax is a federal tax. Except for the states of Connecticut and Minnesota, no other state has a gift tax.
In addition to the annual exclusion amount of $14,000.00 per year per person, any amounts contributed by a donor directly to a qualified educational organization for tuition or paid directly to a health care provider for medical services are excluded from gift taxation. Also gifts made to qualified charitable, religious, educational or other tax exempt organizations are completely gift tax free and can permit the donor to have an income tax deduction.
One disadvantage of gifts is that the donee takes the donor’s income tax cost basis for the property that is the subject of the gift. Therefore, if the donee later sells an asset that has appreciated, then the donee pays tax on the difference between the sale price and the cost paid for the asset by the donor. On the other hand, property inherited by a beneficiary as a result of death is revalued at date of death values so that any appreciation of the asset is ignored. Since charitable, religious and other tax exempt organizations are generally not subject to income tax, it can make sense for the donor to contribute assets which have appreciated in making charitable contributions.
Gifting is usually combined with other estate planning tools as individuals and families develop and implement their estate plans. Seeking the advice of professionals, such as an attorney, insures that an estate plan meets an individual’s goals and objectives. Gifting can be an important aspect of an estate plan with benefits not only the donor but also the donee.