Gift Taxes And Tennessee Estate Planning
It is not uncommon for people to re-evaluate their estate plans during the holiday season. In a world where so much is uncertain, and some family members may be struggling, it is only natural that we may seek out ways we might utilize our resources to help our loved ones. Those with many assets in their estate plan may be thinking of gifting an asset, or some cash, during the holidays. While this is a complex area of the law that contains many exceptions and exemptions, this article aims to give a brief overview of the general laws and regulations, both in Tennessee and at the federal level, that you should keep in mind in such situations. You should consult with a seasoned wills and estates attorney for advice on your specific situation.
Can I Avoid Taxes by Gifting an Asset for Less than its Market Value?
The above question arises when a client wants to, for example, sell the family vacation home in Gatlinburg to their child for $5. However, undervaluing an asset would not sidestep any applicable taxes. The difference between what the gift was valued at and what it was sold for would generally be considered “gifted” and subject to gift and estate tax rules.
Generally, a “gift” is defined by the IRS as the transfer of assets or money without expecting, or receiving, anything of equal or greater value in return. While determining whether something is a “gift” is straightforward in cases of straight cash, the process can become muddied when it is an item, asset, or property. Generally, the value of an asset is going to be set at what a reasonable person would pay to acquire the asset.
So, in the example above where a vacation home is gifted to a child, if the vacation house is valued at $500,000 dollars by a real estate appraiser and you sell the property to your child for $5 dollars, the government would likely view the transaction as a transfer of property with an amount of $495,000 effectively gifted, and that amount subject to the rules surrounding gift and estate tax. Whether a gift tax payment really comes due depends on a few different factors. Many exemptions also apply, so it is advisable to consult an attorney about your particular circumstances.
Federal Gift Tax
Under Federal law, every U.S. citizen is subjected to an annual gift tax exclusion. This allows every person the ability to gift a certain amount to each person you choose up to the exclusion limit every year without worrying about a tax being levied on the gifts.
There are two categories of federal tax exemption: the annual exclusion limit ($16,000 dollars per individual per year) and the lifetime gift and estate tax exemption (12.06 million dollars). These categories relate to one another. While you likely do not need to worry about the kitten that you bought your granddaughter for Christmas, if you ever gift to someone in excess of the annual limit, the excess value flows over and builds toward your lifetime gift and tax exemption. For example, if you gift someone a car worth $26,000, $16,000 caps out your annual exemption, and the remaining $10,000 in value will be tallied toward your lifetime limit.
It is important to note that the federal government considers the estate you leave behind as part of this lifetime exclusion limit. While most people will never have to worry about exceeding the lifetime exclusion of over $12 million, those who do stand to exceed this – whether through gifting, or through bequeathment of your estate – should be aware that the federal government heavily taxes the overages – up to 40%.
There is Currently No Tennessee Gift Tax
The Tennessee gift tax was repealed in 2012. While every U.S. citizen is subject to the same Federal gift tax rules, the tax laws of the various states do differ. If you gift a property or asset in another state ensure that you are aware of that state’s tax policies.
Contact Fort, Holloway & Rogers
Proper estate planning is essential to ensuring the well-being of your family. The Franklin estate planning & probate lawyers at Fort, Holloway & Rogers have helped countless clients understand and navigate property and estate law. Contact our office to speak with our experienced legal experts about your case today.