Those who are comfortable financially often like the idea of being able to give money to friends (or adult children) in need. However, if you plan to give large amounts of money, you need to plan ahead.
We have all received gifts throughout our lives, whether it be for a birthday, wedding, baptism, or bat mitzvah. Anywhere from $200 to $1,000, these gifts do not require reporting or significant planning. We simply write a check and give it to the recipient. When we consider gifting a large sum of money to someone, the stakes become higher, and we need to consider the impact on our financial security as well as the relationship with the gift recipient.
Often times, clients will ask us: Am I financially able to give my child a large sum of money, whether it is for a house purchase or to help them get by during a difficult time? As much as this is a financial decision, it is also an emotional decision. If a family member came to me during a crisis and asked for financial help, would I be able to reconcile the emotional feelings with the financial impact?
What should you be thinking about as you formulate a gifting strategy? Do you need a gifting strategy?
Do you want to maintain control over assets and pass them to children upon death or would you rather pass assets while you are still alive? How much, to whom, and when?
Here are a few considerations as you evaluate your gifting strategy:
• Be flexible with gifting. If there is a market downturn, reduce gifting. If long-term care or some other major medical event occurs, make it known to family members that gifting will need to be reduced or take a pause in that year and possibly future years.
Set limits on family support. Will you pay cell phone bills or auto insurance? Or will it be a set dollar amount per year or per month? Clients run into trouble when a child asks for money periodically, and they don’t realize the total amount of support that they provided the child.
Consider equal or unequal gifting. If you provide support for one child or grandchildren at a time, do you want overall gifting for all children/grandchildren to be equal? If so, you may need to adjust estate planning documents to account for unequal gifts during their lifetimes.
If gifting will be purposefully unequal because of differing financial circumstances, how do you address this with your children? Are they OK with the unequal support/gifts? Make sure that there are no surprises for children/grandchildren at death as this can cause family discord if wishes are not known prior to death.
The annual gift tax exclusion is $14,000 for 2015. Each spouse can gift $14,000 to an individual so the total amount of gifts can be $28,000 per couple to an individual. If you have two kids, you could gift a total of $56,000 in 2015. This is subject to change each year. Refer to the IRS website on gift taxes.
â—‹ If you gift over the annual exclusion amount, you must file a gift tax return. The gift tax return is due no later than April 15 in the year after the gift was made. The gift tax return is called a Form 709, and an accountant can complete and file it.
• Other indirect gifting. The direct payment of education and medical bills is not considered part of the gift exclusion. To qualify, however, you must pay the higher education or hospital/doctor directly so that it is not considered a gift. Do not write a check directly to the individual. (see Section “Transfers Not Subject to Gift Tax”)
• If you live in a state where you do not receive a deduction for 529 plan contributions, then perhaps consider gifting to your son or daughter. They can put money in 529 and receive the deduction (e.g., grandparent lives in New Jersey and thus has no deduction, but her son/daughter lives in New York or has New York income; the child would receive deduction on his/her New York return.)
• Beneficiary designations on retirement assets/IRAs. Be careful naming a minor as a direct beneficiary as they would need a custodian or trust to manage the assets. Structure beneficiary designations as you would want them. Once an individual inherits assets, they can in turn name their own beneficiaries.
Each person’s situation is unique. It is important to work with your team of advisors, including your wealth manager, attorney and accountant, to make sure that your gifting objectives are being addressed and that your own financial plan has stable footing in light of your gifting goals.
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