Limits on Tax-Free Lifetime Gifts

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 What Is a Personal Gift In a Will?

In legal terms, a personal gift in a will can be defined as property distributed from one person to another through the use of a valid will. Because the gift will be distributed according to what is stated in the will, the gift will only transfer to the recipient when the creator of the will dies. This person is referred to as the testator, or the decedent.

According to general estate laws, such gifts are considered to be personal due to the fact that they are transferred from one person to another specific individual. This would be in opposition to a general entity, such as a charity or organization.

There are many reasons why a testator may want to distribute gifts through a will upon their death, rather than over the course of their lifetime. An example of this would be if the owner of the property will still be using the asset or property while they are alive, such as their residential home. It is likely that they would want to transfer the property only after their death, so that they can continue using the property or in this example, remain in their home.

What Are Estate And Gift Taxes? Are There Limits On Tax-Free Lifetime Gifts?

Simply put, estate taxes are owed and paid by your estate after you die. Estate taxes are imposed by the federal government, and may also be known as a death tax or inheritance tax. If property or assets are transferred to another individual upon the testator’s death, this estate tax may be imposed. It is important to note that most estates will not owe any estate taxes, whether federal or state, because they will not meet size requirements. As of 2020, estate taxes are generally only paid when an estate is worth more than $11.58 million. The specific estate tax rate can be up to 40%, based on the size of the estate.

Gift taxes are taxes paid on gifts that are made over the course of a person’s lifetime. When property or assets are transferred from a testator to another person while the testator is still alive, a gift tax may be imposed. As of 2020, there is a lifetime exemption of $11.58 million. What this means is that if you give less than $11.58 million over the course of your lifetime, you will not be required to pay federal gift taxes.

Additionally, you can give up to $15,000 in cash or property gifts each calendar year to another individual, completely free of tax. It is important to note that this annual exclusion of $15,000 would not contribute towards the overall $11.58 million lifetime gift limit. The gift tax only applies to the amount of gifts that you make in excess of the $15,000 annual exclusion. These amounts are then decreased from your lifetime exclusion of $11.58 million, which is completed by the Internal Revenue Service (“IRS”).

How Have The Limits Changed Over The Years?

The limits placed on lifetime exemptions have experienced considerable changes over the years. The amount of the exemption is generally determined by the rate of inflation; however, the tax rate will continue to be 40%. In 2014, the lifetime gift tax exemption was $5,340,000. In 2013, the lifetime gift tax exemption was $5,250,000. This is according to the stipulations outlined in the American Taxpayer Relief Act, which also authorized an increase in the tax rate to 40%.

In 2012, the lifetime exemption was $5,120,000 with a tax rate of 35%. This was the same rate in 2011, when the exemption was $5,000,000. This signals a dramatic increase from the $1,000,000 exemption with a 35% tax rate in 2010. The changes that occurred between 2010 and 2012 resulted from a change as stated in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

In 2015, the lifetime exemption was expected to be increased to $5,430,000. This figure represented an increase of $90,000 that could be left to heirs without being required to pay any taxes. Additionally, as a married couple, both spouses can have their own exemption. What this means is that they will be able to give away $10,860,000 without being subject to tax, as long as they did not previously make any lifetime gifts.

What Are The Current Federal Estate Tax Laws? Are There Any Estate Or Inheritance Taxes At The State Level?

To reiterate, the purpose of federal estate taxes is to tax the right to transfer property at your death. As of 2020, federal estate taxes can be imposed on an estate by the federal government, with estate taxes reaching up to 40% of the total value of an estate. The federal government may only tax your estate if the gross value of your estate exceeds your lifetime exclusion, as previously mentioned. As of 2020, this number is $11.58 million for individuals, or $23.16 million for those who are married.

Another federal estate tax law allows for a marital deduction, in which the decedent’s estate would pass tax free to their living spouse. Because of this, upon the death of the first spouse, property will pass to the surviving spouse under the marital deduction tax free. However, that property then becomes a part of the surviving spouse’s estate; meaning, the value of the estate that remains when the second spouse dies will then be subject to federal or state estate taxation.

In addition to the possibility of federal estate taxes, some states also collect an estate and/or an inheritance tax. As of 2019, the following states collect an inheritance tax:

  • Iowa;
  • Kentucky;
  • Maryland;
  • Nebraska;
  • New Jersey; and
  • Pennsylvania.

It is important to note that each of these aforementioned states have different laws in terms of who is exempt from state inheritance tax, and who is not. What this means is that certain individuals or estates may not be required to pay an estate tax, even if the estate is located in one of the states listed above.

What Else Should I Know About Personal Gifts In a Will?

A gift distributed through a will after death is known as a “testamentary gift.” A gift distributed while the person is still alive is referred to as an “inter vivos gift.” Generally speaking, inter vivos gifts are transferred through means other than a will, such as a living trust.

Whether to distribute gifts during life or after death is mostly a matter of individual preference. If the property owner will still be using the property up until their death, it may be better to transfer the gift through a will. However, if they would like to have property distributed to a recipient while they are still alive, it may be better to transfer it as an inter vivos gift.

Testamentary gifts are sometimes revocable. Meaning, they can sometimes be revoked or withdrawn at the request of the donor. Because the gift will only be transferred upon the testator’s death, they are free to use the property during their lifetime. Finally, the donor can generally place conditions on the gift. An example of this would be if the testator says the recipient is only to receive the gift once they have reached their 18th birthday.

Inter vivos gifts provide immediate gratification. Both the recipient and the donor will see the gift being used while the donor is still alive. Inter vivos gifts are permanent and irrevocable; meaning, the donor cannot repossess the item once it has been transferred. Finally, some inter vivos gifts are associated with various benefits such as considerable tax breaks.

Do I Need An Attorney For Issues Involving Limits On Tax-Free Lifetime Gifts?

If you are considering using your will to distribute gifts, or if you are experiencing issues associated with gift and estate taxes, you should consult with an experienced and local estate lawyer. As much of estate and gift tax law can vary from state to state, working with an attorney will help ensure you receive the best possible legal information for your area. An estate attorney can also help you create your will, distribute gifts, as well as represent you in court, as needed.


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