Many people use gifting as part of an estate planning strategy to decrease taxes, both their own and those of their inheritors. However, if you intend to use gifting in this way, you must be careful about it because gift taxes may also apply. It may help to understand some of the basics of gifting.
What Are the Different Types of Gifts?
There are two different types of gifts: a gift of future interest and a gift of a present. A gift of future interest means that you give the gift now but the recipient must wait until some future point to enjoy it. This is different from a gift of a present, which the recipient gets to enjoy right away.
How Is a Gift Different From a Loan or a Sale?
When you loan money or property to someone else, there is an expectation understood by both you and the other party that the situation is temporary. If you loan money, then the recipient agrees to pay you back according to agreed-upon terms. If you loan something that belongs to you, such as an automobile, it is understood that the recipient only has use of it for a specified period of time and must return it to you when that time period has elapsed.
Like a gift, a sale involves a permanent transfer of property. However, unlike a gift, a sale involves an exchange in which each party gives the other something of value. A gift is a transfer of property with no expectation of receiving a benefit or any other consideration in return.
What Is the Difference Between a Total or Partial Gift?
A partial gift occurs when the recipient does give some consideration in exchange for the gift. What makes a partial gift different from a sale is that the value of the property gifted to the recipient is much more than the consideration that you receive in return. On the other hand, a total gift, also called a complete gift, is one in which you receive no consideration at all in exchange for the property that you transfer to another.
Who Are Potential Gift Recipients?
There are few limitations on whom you can give gifts to. Some people give gifts to charitable organizations that promote a cause that they think is worthy. Others give gifts to members of their family. However, if you choose, you can also give gifts to total strangers.
There are limits as to how much you can give in gifts per year or per lifetime to avoid taxes. An estate planning lawyer in King of Prussia, PA can help you formulate a gift-giving strategy. Contact a law office to arrange a consultation.
Thanks to Klenk Law for their insight into estate planning and gifting.