Many people might associate gift giving with a will and testament after someone has passed away. But there are ways to give large gifts to friends and family inter vivos, or between two living people.
Kevin Lenhard, chair of the estate planning group at Kohrman, Jackson & Krantz in Cleveland, and Ken Sable, owner of Sable Group in Beachwood, said giving a large gift has a different process depending on if it’s inter vivos or a testamentary trust of a deceased person.
Sable said filing a will is beneficial, but the person filing it should be careful as to make sure beneficiaries are all titled and credited properly. If they are not titled correctly, the assets left behind go to probate court.
“A will is going to describe the beneficiaries, who the beneficiaries are, and what they get and how much they get compared to the other beneficiaries,” Sable said. “Wills are fine and everybody should have one, but the problem with wills is that any asset that flows through a will to the beneficiaries will be subject to probate court.”
Probate court is a judge-supervised transfer of a deceased person’s assets. A will can go through probate court for a number of reasons, such as the will not being filled out clearly, or if the beneficiaries of the assets have also passed away. The entire process can last for weeks or even months.
Giving away assets, such as money, is an easier process if the donor is alive at the time of the gift. However, there are limits to how much money an individual can give to somebody else before that donor is subject to a gift tax.
“Everybody can give away, presently, $15,000 per donee per year without any tax consequences,” Lenhard said. “But, if the gift is larger than that, it could be subject to gift tax. Now, the gift tax amounts are quite large, (so any smaller gifts) don’t usually result in a gift tax. But the donor, if he or she gives a gift in excess of $15,000 during life to a person, they would be required to file a gift tax return just to keep track of it.”
While the donor has to file a tax return if they go over that $15,000 limit and pay any necessary taxes, the person who receives the donation will not have to pay any taxes. The only exception is if that money is given in the form of things such as stocks. Any money made while investing that stock will be taxed on the receiver’s end.
“When you receive a gift, it’s tax free,” Sable said. “Depending on the type of asset, what you do with it after the fact might have tax consequences. In other words, if someone leaves you cash, that cash is tax-free. If someone leaves you stock that they owned when they died, and then you go and sell the stock, you might have income or you might have a loss, depending on the value of the stock when you sell it.”
Lenhard added, “A gift will not be taxed on the receiver’s end. Now going forward, say you gave them stock of $50,000, after they accept that stock, generated dividends or other distributions, the recipient of that gift would be taxed moving forward on the income generated by the gift.”
Sable said the same thing happens when someone is given an individual retirement account upon a person’s death.
“If someone leaves you their IRA, and you’re the beneficiary of their IRA, receiving that IRA is income tax free,” Sable said. “When you take our distribution from the IRA, you pay tax on it.”
This article originally appeared on Cleveland Jewish News.
