Individuals who are currently going through the process of estate planning might wonder if it makes more sense financially to gift money and property while still alive or to leave it to heirs in a will. When deciding which option to choose, you need to familiarize yourself with the gift tax and the estate tax.
The Gift Tax
When you give gifts while you're still alive, they may be subject to a gift tax. You might not be aware of the gift tax because usually gifts aren't valuable enough to exceed the tax-free gift allowance, which will be $14,000 in tax year 2015. There is also a lifetime gift tax exemption that will be 5.34 million in 2015.
If you give money or property worth more than this, your gift will be subject to a gift tax rate that you need to be aware of when deciding whether to give now or leave property in your estate.
The Estate Tax
Leave property to your heirs in an estate and the gift will still be subject to tax. In this case, the estate tax will be applicable rather than the gift tax. The estate tax will be calculated based on the value of your entire estate as opposed to the value of one individual gift.
Obviously, you'll pass less in taxes if you give property as a gift while you're still alive if the property is worth less than $14,000. However, the following are a few drawbacks to gifting property while you're still alive that you may want to take into account before making a decision:
- It might turn out that you need the property down the road- You can't predict the future and you never know how your financial condition will change in future years. Even if you're financially set at the moment, you might lose money later through economic downturns or other events that leave you wishing you had kept a gifted property.
- You might want to change your mind- If you wait to leave property in your estate, you know that gifts will be given according to your last and final wishes. You can avoid living with regret by leaving gifts in your estate and being able to make modifications if necessary.
- It might be better for your heirs if you wait- If you're planning on gifting property that brings with it a great deal of responsibility, your heirs might not yet be ready. Sometimes, heirs will be better able to handle their inheritance from you after you've already passed away.
For more information, contact attorneys like Donald B Linsky & Associate Pa.
