Estate Planning: How to Make Gifts While Avoiding Gift Taxes
Estate planning is an important aspect of personal finance. It involves making decisions about how your assets will be distributed after your death. One way to distribute your assets is by making gifts during your lifetime. However, making gifts can result in gift taxes. In this article, we will discuss how to make gifts while avoiding gift taxes.
What are Gift Taxes?
Gift taxes are taxes imposed on the transfer of assets from one person to another while receiving nothing or less than the full value in return. In other words, if you give someone a gift, you may have to pay gift taxes. However, there are exemptions and exclusions that can help you avoid gift taxes.
Exemptions to Gift Taxes
There are certain exemptions to gift taxes that you can take advantage of. The first exemption is the annual exclusion. You're allowed to give up to $15,000 per person per year without having to pay gift taxes. This means that if you have four children, you can give each of them $15,000 per year without having to pay gift taxes.
The second exemption is the lifetime exemption. You're allowed to give away up to $11.58 million during your lifetime without having to pay gift taxes. However, this exemption is also used for estate taxes. This means that if you use some of your lifetime exemption for gifts, you'll have less to use for estate taxes.
Exclusions to Gift Taxes
There are certain exclusions to gift taxes that don't count towards your annual or lifetime exemption. The first exclusion is for medical expenses. You can pay for someone's medical expenses without having to pay gift taxes. However, you must pay the medical provider directly, not the individual.
The second exclusion is for educational expenses. You can pay for someone's educational expenses without having to pay gift taxes. However, you must pay the educational institution directly, not the individual.
The third exclusion is for gifts to spouses. You're allowed to give unlimited gifts to your spouse without having to pay gift taxes.
How to Make Gifts While Avoiding Gift Taxes
Now that you know about exemptions and exclusions to gift taxes, here are some strategies to help you make gifts while avoiding gift taxes:
1. Give away the annual exclusion amount. As mentioned earlier, you're allowed to give up to $15,000 per person per year without having to pay gift taxes. If you have multiple children or grandchildren, you can give each of them $15,000 per year.
2. Pay for someone's medical or educational expenses. If you have a family member who needs medical or educational assistance, you can pay for those expenses directly. As mentioned earlier, those payments are excluded from gift taxes.
3. Use the lifetime exemption. If you want to give someone more than the annual exclusion amount, you can use your lifetime exemption. However, keep in mind that this exemption is also used for estate taxes.
4. Gift property instead of cash. Property such as real estate or stock can appreciate in value over time. By giving a property as a gift, you're only required to pay gift taxes based on the current value. However, the recipient will receive the property's future appreciation without having to pay taxes on it.
The Bottom Line
Estate planning involves making decisions about how your assets will be distributed after your death. Making gifts during your lifetime is one way to distribute your assets. However, making gifts can result in gift taxes. By taking advantage of exemptions and exclusions to gift taxes and using strategic gifting strategies, you can make gifts while avoiding gift taxes. It's important to consult with a financial advisor or tax professional to ensure that your gifting strategy aligns with your overall estate planning goals.