Giving large gifts of cash or property to your heirs while you are still around to see them enjoy it is something a lot of people consider. But what often stands in the way of such gifts is fear of an unforeseen tax bill.
The gifting process
In 2022, the government allows individuals to give up to $16,000 worth of cash or property to an unlimited number of individuals.
For married couples, each spouse can give up to $16,000. So, in theory, two parents could give each of their children $32,000 without having to pay taxes on that gift. Similarly, the person(s) receiving the gift will also be free of any tax burden.
The gifting process is rather straight forward when it comes to cash. Gifting property, on the other hand, is a bit trickier.
“The IRS can be quite picky about valuations, so gifting a $50,000 dwelling and saying it’s only worth $16,000 is likely to be challenged,” says Warren Ward, a certified financial planner at WAW Planning & Investments in Columbus, Ind. “You’d want an independent valuation, perhaps even an appraisal, if you were to gift property instead of cash.”
Mind your limits
But Ward says his clients rarely run into a gifting problem because individuals are given a lifetime cap of $12.06 million in estate gifts.
That means that, for most people, you can give more than the $16,000 allotted for 2022, as long as you don’t expect the estate to be greater than that lifetime limit (which is currently slated to drop down to about $5.5 million in 2025).
Those who exceed the $16,000 yearly limit must file a special form (709). Professional tax preparers are familiar with the 709 form, and it does not complicate either party’s tax liability in any way.
Be aware that you must gift the property or money to your heirs outright. And once the gift is made, you will no longer have any control over the asset.
As with all finance and tax matters, consult your financial advisor first and keep good records and documentation of the gifts you make in case you or your heirs need to prove they were gifts in the future.
If you want to make a significant gift of cash or property to your heirs, there’s nothing in the tax code standing in your way. You can help those you love and as a bonus, experience the joy and satisfaction of seeing how much your gift is appreciated.