Now or Later? When You Should Make Gifts to Your Heirs?
Obviously, any estate plan involves leaving gifts to your heirs. But quite often, the question revolves around whether it's better to give them your assets when you pass away, or should you give them away now? Which is better for them, and which is better for you?
The first thing you should know before you make such a decision; what is the difference between the gift tax and the estate tax?
The gift tax is imposed by state and federal governments on any transfer of property without compensation. In this case, the definition of property includes both tangible assets, such as furniture, antiques and art, as well as intangible assets such as stocks or cash. Under current law, you are exempt from gift taxes on lifetime gifts the total up to $5.34 million. Any gifts to take you over the lifetime amount can be taxed up to 40% of their value. However, keep in mind that this is a lifetime exemption, which means exactly what it sounds like; it's over the course of your entire life. There is also an "annual exclusion" to consider, which means you can also give anyone a tax-free gift of his much is $14,000 per person, without affecting the lifetime exemption in any way.
The estate tax is imposed by federal and state governments on any transfer of tangible or intangible property by your estate after your death. The estate tax is calculated by combining all of your assets at the time of your passing and determining the value of your "gross estate," which includes all assets such as real estate, businesses, stocks and cash, as well as your personal belongings. After determining the gross value of your assets, any deductions that you may qualify for, such as charitable contributions for funeral expenses, are then subtracted from the amount, giving you a net estate value. That amount is then added to any taxable gifts that have used up parts of your exemption to figure out how much of your estate is taxable.
There are a number of advantages and disadvantages to gifting now rather than later. Not all of them have to do with taxes and finances, and you should consider all carefully. For example, if you give your heirs the money now, you'll get to see them enjoy it. In fact, you may even be able to advise them on how to spend or invest it. Giving them at least some of your money now actually gives you an opportunity to see your gifts in action and to see what a difference the gift makes in their lives. It also gives you the opportunity to make sure that any money or other assets go for something specific that you want to pay for. That can include something like their wedding, college tuition (which could also qualify for the educational exclusion from the gift tax), or even a down payment on a home to live in happily ever after. Imagine the pleasure of enjoying all of that with them, instead of waiting until you're gone.
Of course, there are also advantages to waiting until you pass away before giving assets to your heirs. Most obvious one is, you may need the money later yourself. You want to make sure you have enough so that you can enjoy your retirement, or pay for unexpected medical expenses that are not covered by insurance. At some point, you may even need long-term care, and you may need the money to pay for that. Also, leaving them money in a will that doesn't take effect until after you pass away leaves you free to change your mind at some point between now and then. Also, there is a school of thought that says that your heirs would appreciate what you give them more after you pass away, and would be more likely to spend it wisely. After all, they will be older later than they are now, and sometimes age brings wisdom.
Now or later? It's up to you. But there really is a lot to consider, and contacting an estate planning professional can help you sort it all out.
