Gifts and Inheritances

When planning gifts and inheritances, you need to know the rules and plan properly. Keep the following in mind:

An individual may give up to the annual gift tax exclusion amount (currently $11,000 and indexed for inflation) to as many people as desired each year without any gift tax consequences.
Lifetime gifts may be used to decrease the donor’s taxable estate.
Unlimited amounts can be given to a spouse (except non-citizens) or to a school or medical facility for a person’s tuition or health care. Payment for qualified medical and educational expenses must be made directly to the service provider.
Gifts and inheritances are not taxable to the recipient but, of course, the interest earned on this money is.
Seek professional assistance for high net worth estates or complicated asset transfers.
Donors must be careful not to leave themselves short of income.
Plan for the disposition of untitled personal property. This is all the items people own for which the owner is not identified in a written document. Examples include tools, furniture, books, dishes, collections, jewelry, clothing, and more.
Talking about untitled property can be sensitive because of the emotions involved, sentimental meanings attached to various possessions, and differing perceptions of what’s fair in the distribution process. Also, unlike a bank account or stock, there is often only one of an untitled property item, so it is impossible to divide everything equally.
Untitled personal property can be distributed in several ways, including memorandums attached to a will, lists given to a person’s executor or family members, gifts made during a donor’s lifetime, drawing names out of a hat, verbal promises, and labeling items.
For additional information on transferring untitled personal property, see the University of Minnesota’s Who Gets Grandma’s Yellow Pie Plate?.
Communicate openly with heirs about intentions to leave an inheritance. It is often easier for parents to bring up the subject than for adult children to risk appearing “greedy.”
Beneficiaries should never use a potential inheritance as an excuse not to save. There are simply too many unknowns such as the donor’s health, long-term care needs, and life expectancy.
Recent research by AARP found that, for most baby boomers, inheritances will be a small part of their retirement nest egg. The median (midway point) value of inheritances received through 2001 was just under $48,000.