Testamentary Transfers or Lifetime Transfers

The term “transfer,” in estate planning, means giving your property interest away to someone else.  The most common example is giving a gift.  Transfers of property interests can occur either during your lifetime, or after your death.

What is the difference between testamentary and lifetime transfers?

A “testamentary” transfer refers to the distribution of a deceased person’s estate, in the method specified in the will.  On the other hand, a lifetime or “inter vivos” transfer means a transfer or gift made during one’s lifetime.

Federal estate and gift taxes

The federal government imposes both estate taxes and gift taxes on transfers that total over $5.43 million, the rates of which are the same.  However, usually with a lifetime transfer you can transfer more assets with less tax consequences.  By making gifts of certain property that will appreciate or produce income, during your lifetime, you can remove that particular property from your estate, which can lower your estate tax consequences.

The advantages of using the gift tax exclusion

Lifetime transfers also have another benefit, when it comes to taxation.  Lifetime transfers allow you to take advantage of the annual gift tax exclusion, which is not available with testamentary transfers.

What is the annual gift tax exclusion?

The annual gift tax exclusion makes all gifts falling within the exclusion amount for that year, non-taxable. For 2015, the amount of the annual gift tax exclusion is $14,000, per recipient, each year. There is no limit to the number of recipients you may give overall, as long as your gifts are in the amount of $14,000 or less, to any one person, each year. There is an even bigger benefit for married couples.  Spouses are allowed to combine their gift tax exclusion amounts every year by making a joint gift of $28,000 per recipient.

Understanding the unified tax credit

The “unified credit” refers to both the gift tax and estate tax exclusion.  Together, these exclusions allow taxpayers a lifetime exclusion of $5.43 million. This amount is subject to change each year.  The unified credit means that your estate will be exempt from inheritance taxes up to $5.43 million.

The unified credit is also “portable,” meaning that if the entire amount of your unified tax credit is not used, your spouse can use the remainder of your exclusion along with his or her own, upon their death.

Disadvantages of making lifetime transfers

There are some disadvantages of lifetime transfers.  The most important one is the likelihood that you will lose the opportunity to acquire a stepped-up capital gains cost basis for the gifted property, upon your death. This situation occurs when you own property that has a greater value than its current income tax basis. This circumstance occurs either because the value of the property has increased, or you claimed depreciation deductions on your income taxes at some point.

If you have questions regarding asset transfers, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.