As many people age they want to experience the happiness that comes from seeing those they love taken care of. Though passing money along through a will is one means of achieving this end, others prefer to take a more direct approach and give money to loved ones while they are still alive.
It might seem as if giving your money away to others would be a simple endeavor, but the fact is the IRS has developed complicated rules regarding gifts of money and other assets that must be taken into consideration before launching into a giving binge. Keep reading to find out more about how the gift tax works.
What is a gift?
First things first, let’s discuss what a gift is. According to the Internal Revenue Service, a gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” What the IRS means is that if someone receives something of value and the person giving the gift does not receiving something of equal value in return, then a gift has been given. Fair enough.
What isn’t a gift?
It’s important to note that not all transfers of money are considered taxable gifts. For example, charitable contributions, gifts to a spouse, gifts to a political organization as well as tuition or medical payments made on behalf of another person do not qualify as gifts.
Lifetime maximums
The way the gift tax works is that the gift givers, not the recipients, have to pay for it. Thankfully, this tax does not impact the vast majority of Minnesotans given that recent Congressional legislation raised the lifetime gift exclusion to a whopping $5.25 million for 2013 ($5.34 million for 2014). If you’re married, your spouse also has another $5.25 million to give away, meaning that a married couple can collectively give $10.5 million away before incurring any gift tax penalties.
Annual gift tax exclusions
The federal government has decided that for 2013, individuals are allowed to give away up to $14,000 to as many people as they want without counting those gifts towards the $5.25 million lifetime exemption. For example, if you are eager to give $25,000 to your child this year, you won’t actually owe any gift taxes unless you’ve already exhausted your lifetime exemption amount. If you haven’t, then the gift will be dubbed a taxable gift and reduce your lifetime exemption by $11,000 ($25,000 – $14,000). Had you given your child $14,000 instead, the gift would have been ignored. Additionally, you and your wife could each give $14,000 ($28,000 total) and still have the gift ignored for gift tax purposes.
Trust funds
Rather than giving away your money to heirs outright, it’s also possible to create trust funds to hold this money to be distributed at a later date. Trusts are often used when you make a large gift and have concerns about how the person receiving the money will use it. In a trust, the trustee of the money holds the gift for the benefit of the recipient. The trustee then gives the money away to the recipient according to the terms you’ve laid out in a trust document. Such an arrangement works well in cases where your children may be young, prone to financial trouble or likely to go through a divorce.
An experienced Eagan, Minnesota estate planning lawyer can help walk you through the process of establishing or altering a comprehensive estate plan and Minnesota gift tax laws. For more information on estate planning in Minnesota, along with a variety of other topics, contact Joseph M. Flanders of Flanders Law Firm at (612) 424-0398.
Source: “After The Fiscal Cliff Deal: Estate And Gift Tax Explained,” by Deborah Jacobs, published at Forbes.com.
See Our Related Blog Posts:
What Exactly Is A Codicil And How Does It Work In Minnesota?
I read this post completely about the difference of most recent and earlier technologies, it’s remarkable article.