Is it better to leave behind money as a gift while you are still living or as an inheritance after death? Each of these options have different tax consequences.
We’ve gathered what you need to know in order to compare giving gifts versus inheritances to your beneficiaries.
Receiving Money as a Gift
When your beneficiaries receive money as a gift while you are still alive, they may not be required to pay taxes on the gift. Gifts up to $15,000 per individual receiver fall under a gift tax exemption.1
For gifts of $15,000 or more per individual a year, the giver will be required to file a gift tax return Form 709. The amount over $15,000 would be deducted from the benefactor's lifetime gift exclusion. For example, if someone gifts $25,000 to another individual, $10,000 would be deducted from the lifetime gift exclusion.
Married couples can give up to $30,000 to each beneficiary by combining their annual exclusions through a process known as gift splitting. A tax or legal professional can provide guidance on what tax forms must be filed when using the gift-splitting election, regardless of the amount of the gift.
To take advantage of this tax exemption, you can spread gifts out over multiple years while still alive. There is a combined federal lifetime gift and estate tax exclusion of $11.7 million for individuals or $23.4 million for married couples.2
Partial Payment Gifts
There are certain instances where a receiver may pay for a portion of their gift, but not the full value. The most straightforward example may be of a child purchasing their parents' home for less than what the home is worth. If the home is worth $750,000, for example, but a child buys it for $500,000, the $250,000 difference between the purchase price and fair market value is considered a gift and would need to be reported accordingly.
Receiving an Inheritance
Each state has different laws and estate taxes when it comes to inheritances. A few states do have an inheritance tax, which is decided upon based on assets as they are being transferred to beneficiaries. Inheritance tax rates also change depending on the inheritor’s relationship to the giver. This means that spouses, children and siblings could have different inheritance tax rates.
The states that have inheritance taxes include:3
- New Jersey
Each situation is unique. It’s important to evaluate how much money you are looking to leave your loved ones, when you plan on giving them the assets and how much time you have to do so. These considerations, along with the tax consequences, can help you to decide if your beneficiaries would be better off with gifting or inheritance. Our financial advisors at California Retirement Advisors will have some resources to help address your questions and give you confidence in a stressful time.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.