I recently had a husband and wife couple come into my office for a complimentary consultation. This couple, from Nashville, had many questions regarding trusts, wills, and taxes. Most importantly, this couple wanted to avoid taxes and the government getting into their private affairs after they die as much as possible. Also, they didn’t want to leave a mess and unnecessary expenses for their children during their time of grief.
However, during our meeting together, this family had a very common question that I receive from many of my clients, and was a question that almost always leads to common confusion. This family’s question was regarding gifts that they had been making to their children. For the last several years, this family had been making large gifts to their children. Specifically, they had been gifting $28,000 to each child each year. This couple commented that they were aware that they were allowed to do this without any tax consequences. However, this couple wanted to increase the gifts they were making from $28,000 to $50,000 per year to each child, and they wanted to know how much taxes would be due and who would be paying the taxes, themselves or their children.
I explained to this couple that this is a very common question and it is a question that almost always leads to confusion. I explained that the IRS lets you give away up to $28,000 of joint assets or $14,000 of individual assets per recipient to anyone you want without any tax consequences. However, if you give away more than $28,000 then you are said to have made a taxable gift according to the IRS. I discussed with this family that in their case, if they gave away $50,000 to each child, then according to the IRS, they have made a $22,000 taxable gift to each child.
However, I explained and discussed with this family that this does not necessarily mean that you will owe any taxes when you make the gift, and it certainly does not mean that the child you made the gift to will owe any taxes. I discussed with them that you have a life time exemption of $5.4 million, which is indexed for inflation each year. If you make this gift of $50,000 to each child, then your life time estate tax exemption of $5.4 million will be reduced by $44,0000 ($22,000 to each child). If, and only if, you die owning more than $5.4 million in assets on the date of your death will there be any tax consequences.
I cautioned this couple that it is not wise to proceed with a gifting strategy without first speaking with an experienced estate planning lawyer to discuss their options and the tax consequences. I explained that if they make too many taxable gifts during their lifetime, they could find themselves in a situation where they may be subject to the federal estate and gift tax at their deaths, which has a top tax rate of 40%.
If you have questions about estate planning in Tennessee, establishing a revocable living trust or an irrevocable trust, avoiding nursing home poverty and Medicaid planning, probate or any other estate planning topics, then I encourage you to attend one of our live free educational events scheduled this month. At these events, you will hear a lot of real life stories about families that paid thousands of dollars in unnecessary expenses, families that were able to avoid unnecessary expenses, and families that were able to protect their assets from unnecessary nursing home costs and expenses.
I look forward to speaking with you at one of our upcoming live educational events!