If you are thinking about gifting property, you need to be aware that your gift can sometimes trigger taxes. This is true whether you give gifts during your life or after your death. You also need to be aware that giving gifts during your lifetime can sometimes affect estate taxes, if your estate is large enough to trigger this type of taxation. You do not want to be caught by surprise by gift taxes, so you should make certain you make informed choices.
Parman and Easterday provides help to clients in Oklahoma City, Kansas City, and surrounding areas who are interested in gifting property. Whether you are making a gift during your lifetime (an inter vivos gift) or a gift after your death, you should understand tax rules and the implications of your generosity.
Gifting Property During Your Lifetime
Gifting property during your lifetime lets you see the people enjoy the money or property you gift to them. However, you need to be aware that making gifts during your life (called inter vivos gifts) can trigger taxes.
The Internal Revenue Service (IRS) defines a gift to include: “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” This means if you give money or property to someone, it is considered a gift. It is also a gift if you sell something to someone at less than fair market value. For example, if a parent gave a child a $200,000 family home in exchange for $5,000, this would be a gift.
Gifts only trigger taxes if they are above a certain amount. The amount you are allowed to gift before taxes are incurred is called the annual exclusion. As of 2016, the annual exclusion amount is $14,000 per person. If a married couple has a son and daughter, the mother and father could each give each child $14,000 or a total of $28,000 to each child. This would total $56,000 all together. No gift taxes would be charged because no one received more than $14,000 from one person.
There are also situations in which a gift tax is not charged. If you pay for someone’s tuition directly to an educational institute or pay someone’s medical expenses directly to the care provider, no gift tax is charged. Gifts to a spouse are also not subject to gift taxes, nor are gifts to political organizations. Because of these exceptions and the way gift taxes are structured, it is often possible to give generously without triggering any tax liability.
Gifting Property After Your Death
When gifting property after your death, the primary concern is estate taxes. Any property that is included in your taxable estate (which may include property in certain irrevocable trusts) will be valued at your death. If the property exceeds a certain value, the estate will have to pay estate or death taxes.
As of 2016, the excludable value is $5.45 million. This means it is possible to transfer estates up to this amount without triggering any federal estate tax. Married spouses can pass all their assets to each other without taxes, and the survivor can also transfer the deceased spouse’s exclusion amount. This means if a husband dies first and leaves his entire estate to his wife, his wife can pass on $10.9 million tax free (her own excludable amount and her husband’s excludable amount). There are a number of requirements that must be met, but with appropriate tax planning help from an experienced attorney, it is often possible to avoid or significantly reduce estate taxes by creating a tax plan for gifting property after death.
Contact an Attorney Before Gifting Property
A gift should never be a burden to the recipient, and you should never face a surprise tax bill just because you show generosity to someone else. Parman and Easterday can help you understand the rules for gifting property and assist you in working within those rules so your gift doesn’t trigger unexpected obligations to the IRS.
We can provide you with advice to make sure you maximize the value of your gifts without a surprise tax bill at the end. Please give a call us today at (405) 703-9987 or (913) 385-9400 or contact us online to speak with a member of our legal team.