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Lifetime giving: tax overview

| Apr 19, 2021 | Estate And Gift Tax Planning |

Many estate planners and financial advisors guide their clients towards lifetime giving strategies. The objective is typically to diminish the estate, reducing the risk of inheritance taxes.

This article will look at two topics regarding lifetime gifts to individuals: Federal and New Jersey law. Readers should note that these rules are not relevant to donations to charitable organizations.

Federal gift taxes

As per the IRS, people who want to bestow lifetime gifts may typically do so without incurring tax up to a certain limit. The recipients of these gifts can be almost anybody: friends, family and so on.

Further, there is an annual limit under which gifts do not count towards the lifetime non-taxable maximum.

For example, someone could give the maximum exempt value to several people every year and never decrease the total lifetime tax-free gift allowance. In an estate plan, the purpose of this might be to diminish the total value of the estate below the federal inheritance tax minimum.

New Jersey inheritance tax

New Jersey Treasury Department outlines the state inheritance tax class system, which could inform lifetime gifting strategy. In short: It is not likely that there would be New Jersey inheritance tax for estates in general, but leaving money to certain types of beneficiaries might incur taxes.

For example, inheritances from parents to children, between spouses, from grandparents to grandchildren and between many other close relationships are free of tax. However, even modest endowments to siblings, friends and extended family could very well incur a significant tax rate.

There is a relatively high limit for federal inheritance taxation: currently in the millions of dollars. Not all estates are at risk for tax dilution. Even so, many people still decide to give gifts during their own lifetimes rather than upon death, simply for the satisfaction it provides.