It has become more common in recent years to use gifts as a way to pass assets to an heir. It’s more personal, helps reduce estate taxes and permits older individuals to clearly state and execute their wishes. However, this can be cause for concern for prudent financial advisors. Will clients need to worry about paying taxes on their gifts to heirs or family?
For most client, this will not be an issue. However for some high net worth clients the estate, or gift, tax can be of the utmost concern.
IRS rules state that gifts are not taxable up to $14,000 per individual per calendar year. For married couples, that total can be $28,000. If funds are from a joint account, the amount is split evenly between the owners of the account. This also applies to sons and daughters-in-law as well. This means that the annual limit of gifts to be given from one couple to another is $56,000 before taxes enter into the equation.
There are, however, some transfers of assets that are never considered gifts for tax purposes, no matter the amount:
• The recipient is the giver’s spouse and a U.S. citizen
• It’s paid directly to a third party for educational or medical expenses
It’s also important to note that the recipient is not the one who files the gift tax return and pays any tax due. Any individual who gives a client more than the annual gift tax exclusion amount must file a gift tax return, but this does not necessarily mean that they will owe any gift tax.
Any gift amount given over the annual exclusion will accumulate until the maximum “lifetime gift tax exclusion” is reached. Taxpayers don’t currently pay any gift tax until they have reached this lifetime exclusion amount, which is set at $5.43 million in 2016 and adjusted annually for inflation.
The vast majority of estates will not hit the exclusion amount and will never need to worry about an estate, or gift, tax. However, it’s crucial for prudent financial advisor to work diligently with those clients who are considered ultra-high net worth clients to carefully look at estate planning. Without a sound plan, these clients could face owing millions of dollars in estate or income taxes.