If you have a sizable estate, you may be familiar with the option of gifting assets as a way to pass on some of your family’s inheritance early. Before you begin gifting, you must understand the rules of the gift tax and the benefits and disadvantages of gifting your assets.
The federal gift tax is a duty imposed upon gifts above a certain amount. For 2009 and 2010 the gift tax exemption is 13,000 per person, per year. You can give up to this limit each year to each of your loved ones. Any items given to your spouse, however, are not taxable. You also have a separate and independent lifetime gift tax exemption of one million dollars.
Once you go above the exemption level, the gift is considered a taxable gift, but you pay no gift tax in that tax year unless you have exceeded the one million dollar independent lifetime exemption. The recipient does not owe income tax on his or her income tax return for the year of the gift. However, if that item had appreciated in value before the gift was given he or she may owe capital gains taxes in the future if that item is sold.
Gifting is a great way to lower your taxable estate. By giving 13,000 to every family member each year, you are reducing your estate by that much. This could significantly lower the taxes your estate will owe after you pass away.
Another benefit is that you can provide your family with an early inheritance. This can help them put a down payment on a home, purchase a car or simply provide a little extra income.
Gifting also removes assets from your estate, which means they cannot be taken by your creditors once they are gone. Beware, gifts are not safe from the recipient’s lawsuits.
Once you gift an item, it is no longer in your possession. You must be careful not to give away too much and affect your retirement years. You will also loose legal control over your item, so be careful what you give.
If you are gifting to avoid income taxes or estate taxes, you must be careful of gifting items such as stocks that could createa capital gain for you beneficiaries. Weigh your income tax or estate tax savings against any potential capital gains tax that your recipient may owe.