When planning gifts and inheritances, you need to know the rules and plan properly.
Keep the following in mind:
- An individual may give up to the annual gift tax exclusion amount (currently $11,000 and indexed for inflation) to as many people as desired each year without any gift tax consequences.
- Lifetime gifts may be used to decrease the donor’s taxable estate.
- Unlimited amounts can be given to a spouse (except non-citizens) or to a school or medical facility for a person’s tuition or health care. Payment for qualified medical and educational expenses must be made directly to the service provider.
- Gifts and inheritances are not taxable to the recipient but, of course, the interest earned on this money is.
- Seek professional assistance for high net worth estates or complicated asset transfers.
- Donors must be careful not to leave themselves short of income.
- Plan for the disposition of untitled personal property. This is all the items people own for which the owner is not identified in a written document. Examples include tools, furniture, books, dishes, collections, jewelry, clothing, and more.
- Talking about untitled property can be sensitive because of the emotions involved, sentimental meanings attached to various possessions, and differing perceptions of what’s fair in the distribution process. Also, unlike a bank account or stock, there is often only one of an untitled property item, so it is impossible to divide everything equally.
- Untitled personal property can be distributed in several ways, including memorandums attached to a will, lists given to a person’s executor or family members, gifts made during a donor’s lifetime, drawing names out of a hat, verbal promises, and labeling items.
- Communicate openly with heirs about intentions to leave an inheritance. It is often easier for parents to bring up the subject than for adult children to risk appearing “greedy.”
- Beneficiaries should never use a potential inheritance as an excuse not to save. There are simply too many unknowns such as the donor’s health, long-term care needs, and life expectancy.
- Recent research by AARP found that, for most baby boomers, inheritances will be a small part of their retirement nest egg. The median (midway point) value of inheritances received through 2001 was just under $48,000.
This material is provided by SmartAboutMoney.org, a site from the National Endowment for Financial Education (NEFE) that helps people make sound decisions throughout all of life’s financial challenges.
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© 2012 National Endowment for Financial Education. Used with permission. All rights reserved.