“Money Don’t Buy Me Love” or Does It?

Giveth and takethMoney isn't everything, but it is if you want to take estate planning seriously.  Most of us don’t want to just enjoy our retirement and have enough money for old age, but to leave something behind as well. But what's the best way to do that? Should you leave an inheritance or give your money away while you're still around? That is a very important question because the percentage of taxes owed on gifts and inheritance is the same, but one is inclusive and one is exclusive, and the dollar difference between the two is huge.

A recent MarketWatch article, titled “Why it’s better to give than to bequeath,”reminds us that with both gifts and inheritances, it’s the person giving the money who pays the tax. So, for example, if you give a gift or an inheritance to your children, they don’t pay taxes—it will be your estate that has the tax liability and must pay. However, there are huge tax differences between gifts and inheritances. The gift tax is exclusive: it’s on top of the gift.  But is that really relevant to you?  Likely not.  So why this post?  Because this is the kind of advice that everyone is likely reading about and unless they know that facts they can't apply them to their specific situation.  Read on:

Estate taxes don’t come into play for individuals with estates less than $5.43 million (or a married couple with an estate smaller than $10.86 million). There is an exemption from tax liability for most of us, as it’s really just 1% of the population that needs to be concerned. But even though this isn’t going to apply to you now, you should know the difference between gifting and leaving an inheritance. The article tells us that it wasn’t long ago that the tax-free amount was merely a fraction of what it is now. There is no guarantee that the United States won’t someday revert to that early framework, especially with our country’s deficits and the need for tax revenue.

For example, if the person leaving the inheritance or making the gift has $1 million over the tax-free amount, if you were in the 40% tax bracket and gave a million dollars to an heir—you’d also have to cut a check to the IRS for 40%, or $400,000. So that’s a total of $1.4 million: a million to your donee and $400,000 to the IRS.

The article explains that the inheritance tax is inclusive. If you began with that same $1,400,000, but left it as an inheritance rather than a gift, 40% of it would go to estate taxes. The IRS would see a tidy sum of $560,000, and your heirs would get the remaining $840,000.

See the difference?  Only if I have a spare million lying around!  What is even more relevant to me is that fact that gifting has a terrible impact on my ability to pay for long term care!!!  As I tell my clients all the time:  don't confuse tax advice and tax rules with long term care advice with their different  (and often contrary) rules.

So this article seems to imply that, when it comes to taxes, it may be better to gift while you're alive than to leave an inheritance after you pass away. Keep in mind though, this article completely omitted any discussion on basis step-up and capital gains so it may not even be valid tax advice! Just lucky for us, i guess, is that this discussion is pretty much irrelevant for all but a very wealthy few; nevertheless is just might be advice that at some point you might be asked to employ (by a child, perhaps??) and you need to be armed with all the facts! 

You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.  Why not call us for a complimentary consultation at 757-259-0707.  

Reference: MarketWatch (May 4, 2015)“Why it’s better to give than to bequeath”

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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.