Gifting assets during life or after death is a priority for many. It’s good for the soul and might provide significant tax advantages. If gifting to family, friends, a charity or others is important to you, here are some tips to help with the process.
Keep track of the charitable donations you make by documenting them in detail, as you might be able to deduct them on your taxes if you itemize. All taxpayers can deduct up to $300 in cash donations on their 2020 income tax returns, thanks to a provision in the federal CARES Act earlier this year.
Be cautious of giving away highly appreciated assets to an individual while you’re alive. It’s possible you could pass on future capital gains taxes to the recipient. That usually can be avoided if you wait until after you’ve died to pass on assets and if those assets receive a “step-up in basis.” Essentially, when a person leaves property to an heir, the cost basis of the asset receives a “step-up” in basis to its fair market value at the time of the original owner’s death. Step-up in basis reduces capital gains tax liability on property passed to an heir by excluding any appreciation in the property’s value that occurred during the decedent’s lifetime from taxation. Gifting appreciated assets to a charity while you’re alive is treated differently and might be advantageous.
Speaking of gifting assets at death, the most efficient way to do that is by naming beneficiaries. Life insurance and retirement accounts require named beneficiaries, and if you don’t name a person or entity, those assets will go to your estate. It’s important to know that you can name beneficiaries for other assets as well, such as bank accounts, taxable brokerage accounts and even real estate. That is done through “Transfer on Death” and “Pay on Death” nomenclature and simply requires a form with a signature. Be sure that your beneficiaries are up to date by reviewing them periodically.
For individuals and families with larger estates, it is important to pay attention to the current estate tax exemption amounts, $11.58 million for individuals and $23.16 for married couples. Many gifting strategies are being implemented now with the expectation that the exemption amount will significantly decrease in the future. Also, the annual gift limit is $15,000 per person, which means that if you give more than that to any one person, you need to file a gift tax return with the IRS. That doesn’t necessarily mean you owe tax, but reporting is required.
Gifting is a wonderful gesture and very common this time of year, but there are many financial issues to consider. Be sure to talk to your estate planning attorney, tax professional and financial adviser to ensure your strategy is a sound one.
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