There are several factors your should consider when deciding to gift specific assets from your estate. Gifts to your beneficiaries may be made during your lifetime or after you are gone. The Fayetteville estate planning attorneys at Sexton, Bailey Attorneys, PA discuss the pros and cons of gifting during your lifetime.
For those who are relatively certain they will have significant assets left to pass down, deciding when to pass down those assets becomes an important aspect of estate planning. Making a gift will have a direct impact on everything from your estate tax liability to your personal relationship with the beneficiaries of your estate.
Pros of Lifetime Gifting
Deciding to make gifts during your lifetime instead of waiting to make them after you are gone offers some important advantages, including:
- Reducing your taxable estate. Federal gift and estate taxes are levied on your estate following your death. The tax is calculated based on the value of qualifying gifts made during your lifetime plus the value of your estate assets remaining at the time of your death. Gifting during your lifetime (when done carefully and in consultation with an experienced estate planning attorney) can reduce your taxable estate for gift and estate tax purposes.
- Making tax-free gifts. Gifts made during your lifetime may take advantage of the “annual exclusion.” This exclusion allows each taxpayer to make a gift of up to the annual exclusion amount ($16,000 as of tax year 2022) each year, to an unlimited number of recipients without that gift counting against the taxpayer’s lifetime federal gift and estate tax exemption. Additional exclusions may apply to gifts made directly to pay for tuition or medical expenses of the recipient.
- Protecting assets from spouses and creditors of the recipient. If you are concerned that assets passed down to a beneficiary might be at risk because of a spouse or creditors of the recipient (or recipient’s spouse), making the gift in a trust while you are alive can help protect the assets you gift.
- Ability to guide and advise. If you wait until until death to pass down assets, you will not be able to guide and advise the beneficiary on how to manage those assets. Making the gift while you are still alive has the advantage of also passing down your wisdom and financial acumen.
- Personal enjoyment. The most important advantage to making a lifetime gift is the joy of watching how your beneficiary uses the gift.
Cons of Lifetime Gifting
Not surprisingly, there are also some important disadvantages to making lifetime gifts that should be considered when deciding when to make a gift. Those disadvantages include:
- Tax disadvantages. While lifetime gifting can reduce your taxable estate for gift and estate tax purposes, there are also some potentially negative consequences to lifetime gifting that should be considered. For example, you may lose the “stepped-up” basis in property that would apply if the gift was made after your death. This can result in a significantly higher capital gains tax obligation if the beneficiary chooses to sell the gift.
- Loss of control. Although there are some safeguards you can put in place (such as using the terms of a trust) to prevent the complete loss of control, the general rule is that once you gift assets to a beneficiary you no longer have control over how those assets are used.
- Loss of income/assets. Despite careful planning, you could find yourself in a financially insecure position at some point in your life and in need of the assets you already gifted.
- Conflict. In some cases, making a gift during your lifetime to one beneficiary results in conflict within the family.
Contact Northwest Arkansas Estate Planning Attorneys
For additional information, please sign up for one of our FREE estate planning webinars. If you have additional questions or concerns about making lifetime gifts as a part of your estate plan, contact the experienced Fayetteville estate planning attorneys at Sexton, Bailey Attorneys, PA by calling 479-443-0062 to schedule your appointment today.