There are many ways to incorporate gifting and charitable giving into your estate plan. People often make gifts and charitable giving through their estate plan to reduce tax liability for themselves, their estate, and the heirs. This type of planning can also set up a legacy of charitable gifting for future generations. A Massachusetts estate planning attorney can talk to you and help you explore your options for gifting and charitable giving.
You can reduce the amount of your estate by making annual gifts to your loved ones, charities, and others. This strategy can reduce the amount of taxes your estate might have to pay when you die or possibly eliminate those taxes altogether if the gifting takes your estate value below the estate tax threshold. Massachusetts residents face the possibility of both federal and state estate tax.
Federal tax law allows individuals to give anyone up to $15,000 a year without gift tax consequences, called your annual exclusion amount. Both you and your spouse can give the same person up to $15,000 a year, for a total of up to $30,000 a year, without triggering gift tax consequences. Let’s say that you have four grandchildren. You and your spouse can give each grandchild $15,000 a year, for a total of $120,000 a year, without any gift tax consequences.
Also, since Massachusetts doesn’t have its own gift tax, when you gift more than your allowed annual exclusion, you’re not taxed immediately but are using a portion of your Federal estate and gift tax exemption. The federal exemption is currently approximately $11.5M per person in 2020. In 2021, it will be $11.7 million per individual. So, while you’re required to file a gift tax return for gifts over your annual exclusion amount, very few people end up actually paying gift taxes.
Massachusetts and federal tax law allow many different ways to give money or assets to charities and reap benefits like tax advantages. Here are a few examples:
Bequests in Your Will
Charitable organizations can receive bequests from wills. Giving the money in your will has a benefit over giving away the money during your lifetime: You’ll no longer need the money after your death, but you might need the money while you are alive because of massive medical bills or other financial setbacks.
Retirement Plan or Life Insurance Beneficiary
People often make the mistake of thinking that only people can be the named beneficiaries of a retirement plan or life insurance policy. It’s a simple matter to make a charity the beneficiary. Write the name of the charity on the beneficiary designation form with the plan administrator or life insurance company.
Retained Life Estate
Giving real property, like your home or some other land or building, to a charity now and retaining a life estate in the asset could give you a sizeable current tax deduction. You would get to live on or otherwise use the property however you want during your lifetime, and the asset will automatically belong to the charity upon your death.
There are drawbacks to transferring property with a life estate. If some unforeseen situation arises and you need to sell the house to raise money for medical expenses, you wouldn’t be able to do so. Once you give someone else the property and retain a life estate, you no longer own the property—you merely get to use the property. If you want to sell the house and use the proceeds to move into an assisted living facility or to buy a different house, you couldn’t do so.
As a Massachusetts estate planning attorney, I have the expertise to clearly explain the pros and cons of each of your gifting and giving options, so you can choose the ones that will work best for you. Contact The Heritage Law Center today at firstname.lastname@example.org or 617.299.6976 for a free initial consultation.