Giving a gift of money or property to a family member can be immensely rewarding. But it needs to be structured right, so that it does need lead to financial peril for both the giving and receiving parties.
Far too often, what the gift-giver intends as an act of pure generosity can backfire and lead to thousands of extra dollars in tax liability on either side of the transaction. This is because different types of transfers are taxed differently. An attorney specializing in tax and estate planning can help you make the most of your generosity by structuring these transactions in a way that maximizes their value to you and your loved ones.
Generally speaking, a person who sells a piece of property will have to pay income tax on the amount that the property has increased in value. When property is acquired through inheritance, the increase is measured from the value of the property at the time it was inherited. In contrast, appreciation in value of gifted property is measured against the purchase price that the gift-giver originally paid for it. This means that the taxable gain is often much higher on property transferred by gift than by inheritance, leading to higher tax liability for the recipient.
Nonetheless, the benefits of giving gifts to family members during life can be substantial, in both personal and financial terms. For instance, many parents enjoy providing support for their children during their own lifetimes rather waiting to pass property to them through inheritance. Giving gifts can also be an effective way to reduce tax liability by shifting taxable gains to less wealthy family members, whose tax rates are lower. The recipients then pay less in income tax on the same property than the givers would have had to.
In addition to income tax considerations, gift and estate taxes complicate matters further. While property transferred by inheritance may carry fewer income tax consequences, it still may be subject to estate tax. Similarly, depending on the value of the property, a donor may have to pay a gift tax on property given during life - though at least through 2012, the temporary increase in the lifetime gift tax exemption limit makes this an attractive option in many situations.
An experienced Massachusetts tax and estate-planning attorney can assess the various potential outcomes of your specific circumstances. The goal is to help you plan your gifts and other transfers with confidence so that your assets will end up where you want them to be.
