Q: My uncle is going to be passing away in under a year and has told me that he has $75,000 dollars for me. He may give it to me before he passes or after as an inheritance, and he’s asked me which I would prefer. Is it better for him to give this money to me as a cash gift or an inheritance? Is there a difference for tax reasons? Can you tell me what would be the total I receive after tax in both cases?
A. I’m sorry to hear about your uncle, but that’s very generous that he’s going to share that wealth with you. Every situation is different, so I always recommend seeking out a tax professional or estate lawyer.
That said, the tax consequences will be slightly different for your uncle if he gives you all of the money as a gift while he’s alive or leaves it to you in his estate.
Receiving money as a gift
If he gives you a cash gift while he’s alive, up to $14,000 of the gift is tax-free each year because of the gift tax exemption. If he gives you more than $14,000 in a single year, however, your uncle will be responsible for paying a gift tax on the amount over $14,000.
In most cases, the giver of the gift would pay the tax and you would receive the money tax free. However, in the event your uncle does not pay the gift tax or passes away and the IRS cannot collect the tax from his estate, they could legally bill you for that tax. That would be an unwelcome surprise several years down the road.
When time allows, people can make larger gifts while they are still alive, spread out over many years to take advantage of the annual gift tax exemption. There is a combined federal lifetime gift and estate tax exclusion of $5.45 million (2016), but this amount is so large it doesn’t affect most families.
Receiving an inheritance from an estate
If your uncle leaves you the money in his will, any taxes due would come out of his estate and the amount to you would not be taxable. Due to the $5.45 million federal estate tax exclusion, however, it might not be subject to federal tax at all.
State laws and estate tax exemptions vary. While most states have no estate tax or inheritance tax, most of those that do have lower exclusion amounts than the federal government. Most of these states have an estate tax, levied against the estate before assets are distributed. A few, however, have an inheritance tax which is assessed on assets as they are being transferred to inheritors. Inheritance tax rates differ based upon the inheritor’s relationship to the deceased (for example, spouses, children, and siblings may all have different inheritance tax rates).
When will you receive the money?
One thing to consider, however, is when you would get the money if your uncle leaves it to you in his estate. Estates can take a year or more to process, and if your uncle dies with any debts, his creditors could lay claim to some or all of his assets. This might tip the scales in favor of him gifting you the money while he’s still alive, assuming he can pay the gift tax on the amount over $14,000.