You worked hard all your life, managed your money responsibly, and — lo and behold! — your efforts paid off. You find yourself in your golden years in the enviable position of having more gold, so to speak, than you need in your lifetime. You could simply pass on whatever’s left to your kids and grandkids after you’re gone. But why wait? You’d love to see the fruits of your labor enhance their lives today while you can enjoy it.
Still, you hesitate. You’ve heard enough tales of gifting gone wrong. How do you share the wealth in a constructive, impactful, and fair way? In a way that aligns with your family values and steers clear of unintended consequences?
Gifting can be a wonderful thing for the right family with the right strategy at the right time, which begs the question, “Is now the right time for your family?” The answer depends on many factors. At a minimum, be sure your assets will cover your lifetime needs even if you give some away. If it later turns out you need that money, you can’t take it back
Even if recipients are willing and able to help, few parents can bring themselves to walk back gifting expectations. Never mind the potential complexity if you have to request financial support. Ultimately, it’s healthier for everyone involved to err on the side of under-committing.
Once your needs are covered, you’re ready to create your plan. Start by getting clear on gift and estate tax laws. In 2022, anyone can give any recipient up to $16,000 in assets per year without owing federal gift taxes. Exception: gifts to pay tuition or medical expenses are exempt if paid directly to the institution.
Above and beyond the $16,000 annually, each giver may transfer a total of up to $12.06 million per recipient over a lifetime. Transfers over that amount are subject to a tax rate of up to 40%.
Considering giving assets instead of cash? Be sure to understand federal and state income tax laws. In particular, note that appreciated assets gifted during your lifetime lose the step-up in basis they would receive if inherited. Capital gains taxes may apply. California residents who wish to gift real estate should familiarize themselves with Proposition 19 and it’s effects on property taxes.
With an understanding of tax laws, you can maximize the amount transferred to heirs. But your plan needs to take into account other practical and not-so-practical considerations.
You’ll need to decide which assets to give to whom, in what amounts, and when. Will you give a large one-time gift or incremental amounts over time? Allocate based on need, or aim for equity across recipients? Synchronize gifts or give as needs arise? Base amounts on current value or estimated future value?
These choices may be informed by your goals, personal preferences, and circumstances, such as recipient age or asset type. For example, an estate planning goal of reducing your net worth may call for a lump-sum gift. But if the bulk of your money is in retirement accounts, that might not be wise from a tax perspective. Plus, what if your personality lends itself to smaller ongoing gifts versus a dramatic one-time statement?
Prioritizing all this can be a challenge, but navigating the interpersonal aspects of gifting might be the trickiest part. After all, families are comprised of individuals whose strengths, weaknesses, and interrelationships all contribute to family dynamics. Introducing gifting into the equation can cause conflicts to surface and questions of fairness to arise.
Let’s say Janie is a Google engineer with a six-figure salary and $2 million in employee equity. Brother Joe loves his job as a social worker but struggles to pay the rent on his modest salary. Should their parents sign over the house to Joe just because he needs it? Maybe, but not before having heart-to-hearts with everyone involved.
Good old-fashioned sibling rivalry is one thing. Blended families, marital discord, chemical dependency, spendthrifts, and members with special needs can pose even more significant challenges. In the end, a little forethought, transparency, and respect for individual differences go a long way.
The Options Are Many
Still want to gift? Your choices are many. Parents often default to giving cash on an ad hoc basis. This type of gifting has the distinct advantage of being simple and flexible. As long as transfers do not exceed exclusion amounts, taxes are a non-issue.
But if The Bank of Mom and Dad is always open, kids may develop a sense of entitlement. That could strain relationships or put financial peace of mind at risk if hard-earned money is being spent irresponsibly.
So many parents institute boundaries. Some give up to the annual gift tax exclusion amounts as holiday gifts as part of year-end tax planning. Others target their gifts toward large needs, such as college loans, a down payment on a home, and health care expenses. Creative alternatives include educational travel, business startup capital, adoption fees, and fertility treatment.
Funding a Roth IRA for a child is an increasingly popular choice. If passing on a healthy respect for money is a parallel objective, craft your own Roth matching program, much like a company 401k plan. Alternatively, you could match school loan payments, charitable donations, or 529 college plan contributions.
Indeed, 529 college savings plans are the go-to option for many since they enjoy income tax-free growth if used for qualified education expenses. For wealthy parents who wish to remove significant assets from their taxable estate, a lump sum 529 contribution, maybe using 5-year gift tax averaging, could be the perfect gift. For others, more modest, ongoing gifts better fit the family’s needs.
There’s no end to the number of ways you can share your wealth, and its benefits, with your family. While your best bet may be a combination of strategies that balance the many factors at play, complexity can be the enemy of execution. So keep it simple, or work with a financial planner to help keep it all straight. Your family will thank you!