When you have had good fortune throughout your life, you want to share that wealth with the people you love the most. Leaving an inheritance is certainly a great way to pass your good fortune along to those closest to you, but you can’t witness their user enjoyment of their inheritance. You can also set someone up for a difficult transition or expensive tax obligations with a one-time inheritance.
Rather than leaving everything that you own to your loved ones all at once when you die, putting your estate at risk of taxation and your loved ones at risk of overwhelm due to receiving so much at once, you might leave an inheritance but make strategic annual gifts to family numbers for the rest of your life.
Careful planning will allow you to leave as much as possible for the people you love without putting them at risk of increased tax obligations.
The IRS has a limit on untaxed gifts
Any assets or income a person receives can trigger income taxes. Different categories of income or property transfers have different rules that apply to them. When it comes to gifts, your family members will have to pay taxes on what you give them if the fair market value is over the current gift exemption threshold.
It’s important to recognize that’s physical property as well as financial gifts can contribute toward the annual gift limit. Currently, the annual exclusion for gifts is $16,000. If you give someone property worth more than that, they will need to pay taxes on the property’s fair market value.
Gifts can be an important part of a tax minimization plan
Estate planning isn’t just about deciding who to give your property to when you die. It is also about protecting yourself, the people you love and the legacy you want to leave behind at the end of your life. Thinking about the practical and tax implications of your intentions for your estate can help you maximize what your loved ones receive while minimizing taxes and other liabilities.
Being creative with how you handle your property in your estate plan can lead to functional solutions that truly work for your family.