How much can I gift this year?
This is a federal estate tax question. The federal government imposes an estate tax on persons dying with gross estates larger than $11.4 million in 2019. Gross estates include just about everything you own at death, from cash, real estate and investments, to personal property, and 100% of the proceeds from any life insurance policies you owned. Also includible in your gross estate is the value of any property which you gifted within the three years prior to your date of death.
Estates below the $11.4 million level will not be subject to the federal estate tax. However, if sizeable gifts have been made during one’s lifetime, those gifts might eat into the person’s $11.4 million lifetime exemption. In 2019, gifts under $15,000 to any one person during the calendar year will not eat into the $11.4 million federal estate tax exemption amount. Gifts over that amount will. So in a sense, the $11.4 million figure is a combined estate and gift tax exemption.
While Rhode Island and Massachusetts (for example) each has its own state estate tax threshold, neither state imposes a gift tax, and so the above-mentioned annual gift tax exclusion is irrelevant. Gifting is important in the Medicaid planning context, but the $15,000 annual gift tax exclusion has nothing to do with Medicaid rules. For Medicaid planning purposes, gifts of any amount made during a Medicaid applicant’s previous five years will be taken into account when determining whether Medicaid will pay for the applicant’s long term care.
Do I have to report inherited funds on my tax return?
Inherited cash and other property is not includible on your income taxes. Simply put, inheritance is not “income”. However, as mentioned above, estates over a certain size are subject to estate taxes. This means that on the federal level, estates over $11.4 million will be subject to a federal estate tax, in 2019. Estates in Rhode Island over $1,561,719 (2019 figures) will be assessed an estate tax. These taxes are assessed to and payable by the estate prior to distributions being made to the estate’s beneficiaries. Gifts made by the donor and received by the donee while the donor is still alive are not reportable on the donee’s income tax return either.
What if I sell my inherited property?
If you sell inherited property, or sell property received via gift while the donor is still living, you may have to report a “capital gain” on your income tax return. When you receive inherited property, any appreciation in value of the inherited property between the time the person died and the time you sell the property is considered a capital gain, and subject to a tax. Thus, if your father leaves you stock which he purchased for $5,000 (but valued at $20,000 at his date of death), and you sell it for $20,500 after holding onto it for a year, a capital gains tax will be assessed only on the $500 of post-death gain. This, thanks to the benefit of what is referred to in tax parlance as a “stepped-up basis”.
As for property received via lifetime gift, the capital gain can potentially be much larger. A capital gains tax on property received via lifetime gift is assessed on any appreciation in the value of the gifted property over the donor’s life and the donee’s life. Thus, if your father gifts you stock which he purchased for $5,000, and the stock is now valued at $20,500, a capital gains tax will be assessed on all $15,500 of the stock’s gain, should you (the donee) decide to sell it. Here, no stepped-up basis has been received.
These same rules apply to inherited and gifted real estate. Note, however, that real estate received via a life estate deed will receive a stepped-up basis upon the “life tenant’s” death.
If you or your loved ones are in need of experienced counseling for these delicate matters contact the Estate Planning Lawyers at The Law Offices of Howe and Garside