Everyone loves giving gifts at the holidays and the exchange of joy it brings.  But have you considered how gifting to your loved ones can be part of your estate plan and the legacy you leave?

Gifting strategies are for everyone, not just for the wealthy.  If you have amassed any kind of assets in your life (a home, bank accounts, retirement, insurance policies), you undoubtedly want to ensure those assets go to your loved ones both when you are no longer around.  But what if they need help while you are still alive? How can you leverage what you have to best help them? Focus on employing the most prudent estate planning and gifting strategies to distribute it among your chosen beneficiaries in life and death. Those who manage their wealth well will not have to worry about how their family will pay for medical expenses or education as it all will have been planned in advance.

Why Name Beneficiaries?

A beneficiary is an individual who will inherit another’s assets. While it may be hard to think about the possibility of not being around, it is imperative that you name these beneficiaries while you are still of sound mind and ability. If you neglect to do so, what you own can go unclaimed and escheat (be given to) the state instead of your loved ones.  Meet with an estate planning attorney to plan out what you want to do with your existing assets. This meeting will also help you determine which family members you should name as beneficiaries and how much of each asset they will receive in the event of your passing. While these are personal decisions, an estate planner will help you figure out the best way to provide for your family as well as all other beneficiaries you have in mind. They will also lend assistance to minimize taxes and ensure that all of your affairs are handled properly if you are no longer capable of managing them yourself.

Gifts for Now and Later

Keep in mind that life expectancy is difficult to anticipate. As you plan your financial future and that of your family, you must always make sure that you and your dependents have enough money to live on in the present, the short-term and the long-term. That is why you might want to develop a plan to provide gifts to your beneficiaries not just after death, but also during your life.  While inheritances and lifetime gifts are free of tax to the recipients, but they are taxable estate or person giving the gift.  With the exception of one’s spouse, gifts made to family and friends are not deductible. However, there are other options available for you to use while you are alive that will help your dependents receive as much money as possible without incurring excess taxes.

Lifetime vs. Annual Gift Tax Exemptions

The IRS  classifies a gift as anything you give for which you do not receive any consideration.  This includes undervaluing property. For example, if your home is valued at $500,000 but you sell it to a relative for $400,000, according to the IRS you have made a gift to your relative of $100,000.

However, the IRS has two federal gift tax exemptions that allow gifts to be made tax free in certain circumstances: the annual gift tax exclusion and the lifetime gift tax exemption.

The annual gift tax exclusion is the amount that can be given away by an individual in any given year to an unlimited number of people free from any federal gift tax.  In other words, a once a year gift or even a series of gifts made to the same person during the course of one calendar year that does not exceed the annual gift tax exclusion is considered a “freebie” when it comes to federal gift taxes.  Currently the annual gift tax exclusion is $14,000. That means you can give $14,000 each to an unlimited amount of people in any given year and not have to pay taxes.

The lifetime gift tax exemption is the total amount of gifts that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes.  However, they only include the amounts over the annual gift tax exclusion.  In 2016 the lifetime gift tax exemption was set at $5.45 million and will be $5.49 million in 2017 (it adjusts annually for inflation).  This tracks the federal estate tax exemptions because the total lifetime gift amount will, in turn, reduce the amount that can be given away by the individual at death tax free.  For example,  a person can gift away up the exemption amount during life without being taxed, but their estate might be taxed if the balance of the gift and estate tax exemptions do not cover the value of their estate.

Types of Strategies

Leveraging these gift tax exemptions can be helpful ways to provide for loved ones during life tax free and reduce estate taxes at death.  The key is to give as much as possible per year, within designated limits, to as many people as desired.

Though most are not aware of it, these gifts do not have to be made directly to the beneficiary.  Indeed, there are some additional tax savings if they are not.  One can pay tuition for a grandchild or another student in one’s life without having to pay the transfer tax or gift tax. This can be accomplished by writing a check for the student’s tuition directly to the educational institution. This same rule also applies to medical costs or gifts given to a spouse who is a U.S. citizen. These payments are not labeled as “taxable” and will not count against an individual’s lifetime or annual gift tax exclusion totals.

The holidays are a great time to begin a legacy of gifting.  Speak with your accountant, financial advisor, and estate planning attorney to help you develop a strategy that will work best for you and your beneficiaries from a need perspective and maximizes your tax savings.

Kevin Snyder is a husband, father, and an estate planning Orange County estate planning attorney and elder law attorney at Snyder Law, PC in Irvine, California. He is passionate about educating others about estate planning and how it can be used to protect what matters most. Subscribe to this blog or register for an upcoming FREE workshop to learn more.

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