Question: How do I give money from my brother’s estate to other family members tax-free?
Background: My brother, who lived in Arkansas, recently died and I am the executor of his estate. He left everything to me. He wanted two people to be given monetary gifts after his death. Specifically, he wanted $10,000 to be given to my daughter and an additional $10,000 be distributed to his best friend.
Answer from Loraine:
Please accept my condolences on the loss of your brother.
Please note: I assume, based on your question, that your brother left a valid Will which has been admitted to probate, but that the Will did not contain any provisions regarding the money he wanted to have go to his friend and your daughter. Assuming that is correct, then, because your brother left his estate to you, you alone will inherit his assets. Whether there will be any estate taxes or inheritance taxes owed on his estate is a question of federal law and Arkansas law because that is where he lived at the end of his life. If his estate is worth less than the federal tax exemption and if Arkansas has no estate or inheritance taxes on a state level, it is doubtful that any estate or inheritance taxes will be due. For example, in 2020, the federal estate tax exemption was $11.58M, which is reduced by any taxable gifts made by the deceased person during their lifetime.
Once the estate has been fully and properly administered, including paying all legitimate debts and any expenses and taxes, then the estate’s remaining assets should be transferred to you. You can then use those assets to do whatever you please. If you choose to honor the wishes that he expressed to you but that were not stated in his Will, and give $10,000 each to your daughter and your brother’s best friend, you can do so if you wish. Please note, however: these are not bequests by your brother – they are gifts you are making in order to honor what you believe to have been additional wishes that he expressed to you outside of his Will.
There will be no estate or inheritance taxes on these gifts because it’s your money and you are still alive. As for gift taxes, if the gifts are made outright, you can give up to a total of $15,000 to each of any number of people in any given year (as long as those people are U.S. citizens) without incurring any gift taxes, under the gift tax annual exclusion. Since the amounts you say your brother wanted to give are within that amount, you should not have any gift tax consequences if you make these gifts outright and you have not made more than $5,000 in other gifts to either of these individuals in the same calendar year that you give them their $10,000 gifts.
Gifts of cash are generally not income to the recipients. Gift taxes are not paid by the recipient – they are the responsibility of the giver. If you make gifts that are not fully covered by the gift tax annual exclusion in a given year, either due to the total amount of gifts to the same recipient for that year exceeding $15,000 or because the gifts are not outright gifts or otherwise not considered to be “present interest” gifts, then you, as the giver, would need to file a gift tax return for the year in which you make the gift. On the gift tax return, you would report your gifts for the year and the taxable amount of those gifts. The tax generated by any taxable gifts would then be offset by your lifetime estate and gift tax credit, which is the tax credit that creates the previously mentioned tax exemption, before any amount is actually payable by you. This means that, unless you’ve already made a very large number of taxable gifts in your lifetime, you likely would not have to actually pay any gift taxes even if they were generated by your gifts – the gift taxes would simply reduce the amount you can transfer in the future, either on other taxable gifts or at your death, under the estate tax.
Under the facts you describe, you will probably find that you can make the outright $10,000 gifts you want without causing any significant tax consequences to you or the gift recipients.
Ideally, you should consult an estate planning attorney directly about these proposed gifts. Please do not rely solely on this answer for guidance.
Best wishes to you.
Key Estate Planning Takeaway: If you are the beneficiary of a loved one’s estate, either under a Will or under the intestacy laws, and if the loved one had indicated a desire to have amounts distributed to others before his or her death but did not take steps to have those distributions carried out under a Will or beneficiary designation, then you, as the beneficiary, may be able to make gifts that will honor the wishes of your loved one. However, any such gifts will be gifts made by you, not bequests made by your loved one, and the potential tax consequences to you should be considered carefully before you make any such gifts.
This “Q&A with Loraine” blog series features answers from Morgan + DiSalvo Partner Loraine DiSalvo to questions posted on www.avvo.com. A key takeaway from each exchange highlights an important facet of estate planning.