To gift, or not to gift? That is the question. Is it nobler to see your benevolence in action or to escape the slings and arrows of current gift taxation ... or future estate taxation or capital gains taxation?
So much for my loose (very loose) tip of the hat to Shakespeare.
Again, I digress.
That noted, today's blog is all about the give and take of making lifetime gifts to loved ones versus leaving them an inheritance at your passing.
We turn to a recent MarketWatch article titled “Why it’s better to give than to bequeath” to remind us that there are huge tax differences between gifts and inheritances. The gift tax is exclusive: it is on top of the gift.
Consequently, there is an exemption from tax liability for most of us (to include my entire zip code if all added together).
Really it is just 1% of the population that needs to be concerned with estate and gift taxes.
But do not be lulled into a state of complacency.
Even though you may not be in the crosshairs of the estate and gift tax now, you should know the difference between gifting and bequeathing (leaving at death) an inheritance.
The original article reminds us that not long ago the estate and gift tax-free amount was merely a fraction of what it is now. There is no guarantee that the United States will not someday revert to her earlier exemption levels, especially with our country’s deficits and the need for tax revenue.
For example, what if you were leaving the inheritance or making a gift and your estate was $1 million over the current tax-free amount. Under such a scenario, if you gave $1 million dollars to an heir, then you also would cut a check to the IRS for 40%, or $400,000.
Result: You just made a wealth transfer of $1.4 million.
You gave a million to your loved one and $400,000 to the IRS (i.e., your unloved one).
The MarketWatch article explains that the inheritance tax is inclusive. If you began with that same $1,400,000, but left it as an inheritance rather than a gift, 40% of it would go to estate taxes. The IRS would see a tidy sum of $560,000 ... and your heirs would get the remaining $840,000.
See the difference?
In both scenarios, you started with $1.4 million dollars, but in the first situation, your loved one ended up with a million, and in the other, your loved one ended up with just $840,000.
Which glass would you rather drink from?
Bottom line: When it comes to transfer taxes, it is better to gift while you are living than to leave an inheritance after you pass away.
Even though this discussion is pretty much irrelevant but for a very wealthy few, gifting is still more efficient than leaving an inheritance.
The other benefit of gifting is that you get to enjoy the experience of giving with your friends and loved ones.
Do not take action on any wealth transfer strategy without consulting an experienced estate planning attorney.
Reference: MarketWatch (May 4, 2015)“Why it’s better to give than to bequeath”