To Gift or Not to Gift: The Advantages and Disadvantages of Making Lifetime Gifts
Since Massachusetts has such a low estate tax threshold, many of our clients consider making lifetime gifts to their children in order to lower their estate tax liability upon their death. However, the decision to do so should not be taken lightly. There are many serious financial and psychological repercussions to making lifetime gifts.
The advantages of lifetime gifting are fairly straight forward. Most obviously, there are tax advantages. There is a potential for estate and generation-skipping tax savings. In addition, since there is no gift tax in Massachusetts, there is no limit to how much can be gifted per year. There is a federal gift tax, but no tax is due at the time of the gift. For federal purposes, lifetime gifts count towards you estate tax exemption amount, which is currently around $5.5 million and much more than the average person will use. Moreover, there is no income tax incurred by the recipient of the gift. When a gift is given during lifetime, you have the benefit of seeing how the donees treats and enjoys the gift. This can be a good test to see how well a donee manages the gifted amounts of money. For instance, our clients sometimes make adjustments to their estate plan based on these observations.
While the advantages of lifetime gifting are many, the disadvantages are significant as well. Arguably the biggest disadvantage is that the client has irrevocably given up their right to the property that is gifted. This can become a problem if the client needs that money down the road for their own care, or if they need to apply for a benefit program that prohibits this kind of transfer. If the gift is an asset that has a low income tax basis, the donee may incur a capital gain upon sale of the asset. In addition, outright gifts are also subject to the donee’s creditors or a divorce proceeding. One potential psychological repercussion of lifetime gifting is that once the recipient receives the funds, it may affect his or her work ethic and sometimes causes decrease in the concern for the donor. As with all estate planning techniques, all these factors are different depending on the varying personalities of the gift giver and the recipient.
Because of the many advantages and disadvantages attached to lifetime gifts, there is no one size fits all approach in this area. It is important to review your assets with a financial or legal professional, make a list of your goals, and weigh the pros and cons of this decision. If you would like to meet with our attorneys to discuss whether or not lifetime gifting is right for your estate, please reach out to schedule an appointment.