Reply #113: This is a myth. Lifetime gifts, like living trusts, do not avoid inheritance taxes [View All]

[HamdenRice]

It's surprising how often this has come up in this thread. The tax is actually called the "estate and gift tax" and it treats gifts almost identically to inheritance.

Living trusts help avoid the hassle of probate. They don't avoid taxes. Neither do any other lifetime gifts.

In fact, because of the "time value" of money and the incentive to pay taxes later rather than earlier, it's actually more expensive tax-wise to make a life time gift than to pay inheritance taxes. In other words, if you make a gift this year, you may have to pay taxes on it this year; if you wait till you're dead, the tax will be paid then. That's why wealthy people don't in fact transfer their money to their heirs before deaths (the setting up of a living trust being not considered a completed lifetime transfer until death).