Understanding Gift and Estate Taxes: A Guide to Asset Transfers
When it comes to transferring assets to loved ones, it’s essential to understand the implications of gift and estate taxes. These taxes apply to unilateral transfers, where one person gives assets to another without receiving equivalent value in return. This can include adding someone as a joint owner to an account, giving away assets during your lifetime, or leaving assets to heirs after your death.
The Gift and Estate Tax: A Joint Tax
The gift and estate tax is a progressive tax that applies to all unilateral transfers. The tax is paid by the donor, whether it’s the person giving the gift or the estate. The amount of tax owed varies based on the size of the transfer, and very few people owe either gift or estate taxes due to high exemption thresholds.
Annual Exemption and Lifetime Exemption
There are two types of exemptions: annual and lifetime. The annual exemption allows you to give away a certain amount of money or value each year without reporting the gift to the IRS. In 2025, the annual exemption is $19,000 per donor, per recipient. The lifetime exemption is the amount above the annual exemption that you can give away without paying taxes. In 2025, the lifetime exemption is $13.99 million per donor.
How Gift and Estate Taxes Apply
When you make a gift or bequest that exceeds your remaining lifetime exemption and any applicable annual exemption, you will owe gift or estate taxes. For example, if you’ve given away $13 million in reportable gifts over your lifetime and leave an estate worth $5 million, your estate will pay estate taxes on $4.01 million.
Adding a Joint Owner to an Asset: Benefits and Drawbacks
Adding someone as a joint owner to an asset can have significant benefits, such as avoiding probate. However, it’s essential to understand that this transfer is still subject to gift and estate taxes. If you withdraw money from the account for your own benefit, it may trigger the gift tax. If you don’t use the account during the original owner’s lifetime, it could still trigger estate taxes at their death.
Seeking Professional Guidance
Considering the complexities of gift and estate taxes, it’s crucial to seek professional guidance from a financial advisor. They can help you build a comprehensive plan to achieve your family’s financial goals and navigate the tax implications of asset transfers.
Building a Comprehensive Retirement Plan
A financial advisor can help you create a plan that takes into account your financial goals, including avoiding probate and minimizing taxes. They can also help you build an emergency fund and find high-interest savings accounts to grow your wealth.
Finding the Right Financial Advisor
SmartAsset’s free tool can match you with up to three vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one is right for you.
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