To Gift or Bequeath? That is the Question

For those who are fortunate to enjoy their retirement and have enough money to leave behind, they might be wondering whether it is best to leave an inheritance or gift their assets?  Although the percentage of taxes owed on gifts and inheritance is the same, one is inclusive and one is exclusive, and the dollar difference between the two is huge. 

For both gifts and inheritances, the person giving the money pays the tax.  However, the receiver of the gift or inheritance will not owe taxes, it is your estate that is responsible.  In examining the tax differences, the gift tax is exclusive.  For example, if you were in the 40 percent tax bracket and gave $1 million, you would also owe the IRS $400,000.  Contrastingly, the inheritance tax is inclusive.  For example, if you began with $1,400,000 but left it as an inheritance, 40 percent would go to estate taxes.  Thus, the IRS would receive $560,000 and heirs would net $840,000.  In both cases, you started with $1.4 million, but in one case your giftee ended up with a million and in the other case the person who inherited received $840,000. 

Hence, it may be better to gift while you are alive than to leave an inheritance after you are gone.

See Ken Moraif, Why It’s Better to Give Than to Bequeath, Market Watch, May 4, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.