Many people fall into the trap of believing that, since the estate and gift tax rates and credits are the same, it doesn’t matter whether you give property away during your lifetime or under your will.
The fact is, if property is going to be subject to the federal wealth transfer taxes or you are going to use your lifetime credit, you often are better to give and pay taxes now rather than later.
The key to remember once again is that estate and gift taxes are based on the value of assets.
If you have assets that appreciate or produce income, the odds are that they are going to be worth more in a few years than they are now.
If you wait to give the property away, the estate taxes in the future will be higher than gift taxes today, or you will use more of your lifetime credit later than you would today.
If you do not need an asset to maintain your standard of living and you know who eventually want to own it, the family probably will realize a net tax saving if you give the property away sooner rather than later.
Take the case of a successful professional with a net worth of $10 million.
He owns a second home worth $750,000 in a popular resort area.
The home has appreciated and all indications are that it will continue to appreciate for years.
The professional has no plans to sell the property and plans to leave it to his children.
An estate planner shows the professional that his estate is likely to increase in value faster than the estate tax exempt amount and be taxable.
Since he has not made any taxable gifts in his lifetime, if he gives the home to his children now he will use up $750,000 of his lifetime estate and gift tax exemption equivalent.
The future appreciation of the house also will be out of his estate.
He still will have the rest of his credit to shelter other gifts either during his lifetime or in his will.
The home can be removed from the estate without giving it directly to his children.
It can be put in an irrevocable trust for the benefit of the children.
Other structures also are possible.
Suppose the professional doesn’t give away the property now, he has a life expectancy of 15 years, and the home appreciates 5% annually.
At the professional’s death, the home will be worth more than $1.5 million.
The home will use more of his lifetime credit than before, reducing the amount of other wealth that can be sheltered from taxes.
This analysis holds for any appreciating asset—real estate, stocks, and collectables, for example.
If your estate is above the exemption equivalent amount ($11.2 million for singles, and $22.4 million for married couples), you should seriously consider giving away appreciating assets now rather than holding them until your death.
You want to keep enough assets and liquidity to provide for your foreseeable needs, but consider giving away other assets now.
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