Many people want to make gifts to children or other family members during their lifetimes, whether it’s in the form of cash, real estate, or personal property. Besides getting to see beneficiaries enjoy their gifts, you can also use these gifts to reduce the size of your estate and lessen your tax burden. However, you should always keep in mind that there are tax consequences and considerations to those gifts, which could end up causing some problems down the road. Here are two tips to know before you make an estate planning gift.
First, you should know that the annual gift exclusion amount is $15,000 (as of 2019) per gift, for a total lifetime exclusion of $11.4 million. In other words, you can give each of your children gifts up to $15,000 annually until you reach the $11.4 million exclusion. If you go beyond the annual exclusion, you won’t necessarily have to pay a gift tax, but you will have to file a gift tax return. This is because any amount over $15,000 will count towards the lifetime exclusion, which the IRS keeps track of. The gift tax rate is between 18% and 40%, and the gift giver is usually responsible for paying the tax.
Second, as a general rule, if you’re looking to gift property, look to property that will increase in value. This is because the property in your possession at the time of your death will impact probate fees and possibly even estate taxes, depending on the size of your estate. When your beneficiary receives the property as part of the estate, the property receives a "step up in tax basis" that can have a positive impact on capital gains taxes. Making a gift of a property that will increase in value during your lifetime will make the beneficiary’s tax basis the same as yours if the property is ever sold. This can have varying tax consequences down the road, so it’s important to speak with a qualified South Dakota attorney and accountant to determine what your best option is when making a gift.