By Kurt Mortenson, CFP®
For those that have accumulated wealth over a lifetime, gifting is an advantageous estate planning strategy. The tax benefits associated with gifting are relatively straightforward. However, when it comes to the “art” of gifting, things can get a little messy. For example, oftentimes our clients want to gift to their children and/or grandchildren without spoiling them or disincentivizing them from working. What is the best way to go about that?
There are two important items within the tax code that must be understood by any donor, and they are (1) the annual gift tax exclusion and (2) the lifetime gift tax exemption. The annual gift tax exclusion is the monetary amount that you can “gift” per person per year on a tax-free basis. This exclusion covers an unlimited number of people, and according to irs.gov, the annual gift tax exclusion has gone up to $15,000 in 2018, from $14,000 in 2017 (double for spouses splitting gifts).
The lifetime gift tax exemption is the total monetary amount that you can give away over your lifetime. Again, these gifts will be free from taxation; however, it is important to note that the overall gifted amount over your lifetime will reduce the amount of exemption that you have at your disposal to shield your estate at the time of your death. In 2017, the exemption was $5.49 million; but now with the Tax Cuts and Jobs Act (TCJA), it will go up to $11.18 million beginning in 2018.
Now that we’ve covered the details behind the tax benefits, let us now discuss the other side of the conversation, which we are calling the “art” of gifting. This is the softer side, in which the goal is to create strategies that align incentives of all parties involved. Ultimately, we want the donor to feel good about their decision to gift, whether it be to their children, grandchildren, or someone else.
How Much To Gift & How To Go About It
There are not rules of thumb around assessing the proper amount to gift or how to align incentives. However, there are several considerations to be aware of when making the decision on how much to gift & how to go about it.
First, you’d want to think about the amount of money that is comfortable for you to gift. For example, if you and your spouse are considering gifting money to your children, what does your budget or assets allow for? Alternatively, if you are a grandparent seeking to gift to your grandchildren, you may want to discuss with the parents on what they are comfortable with. In most cases, they will be open to any generous gift, but you never want to overstep any boundaries.
Second, you may want to consider the choices in which you have to gift. Some grandparents with large families may want to make sure their gifting is done fairly - which, if grandchildren are of different ages, may cause them to shift priorities and amounts in varying years to be gifted out. In addition, whether parent or grandparent, you’d want to consider what assets the donee already has at their disposal. You may gift a different amount to grandchildren with well-off parents than grandchildren with less well-off parents; the less well-off grandchild may not have the means to fully fund college, so you could donate into their 529 Plan to make sure they do not take on student loan debt.
Third, you should consider the purpose of your gift. Is it to fund their college via donating to their 529 Plan or is to to make sure they have enough money in their Roth IRA for when they retire? There are limitations to what you can donate into each of those options, so that may dictate the amount to gift.
Finally, you may want to look into setting up a trust, such as an incentive trust, a life insurance trust, a irrevocable gift trust, a revocable living trust, or a different kind of trust. The characteristics of the types of trusts vary, but most allow for you to control distributions to beneficiaries. For example, an incentive trust has the ability to force an heir to meet certain requirements - earning a degree, passing a drug test, etc. - in order to receive funds.
What To Gift
At the end of the day, any donor has the ability to gift something to someone. While the least control a donor has would be in the form of gifting cash, there are other options. Some were discussed above, but some items that the donor would have more control in how they are used include 529 Plans, Life Insurance Contracts, Retirement Accounts (IRA and/or Roth), Stock, Medical Expenses, and more.
Here at Cypress Wealth, we would love to speak to you more in depth about the strategies behind gifting, as well as guiding you to understand the restrictions, limitations, and tax consequences associated with anything discussed above. To speak to our team at Cypress Wealth on this topic give us a call at 866.888.6563 or contact one of our offices today.
About Cypress Wealth Services
Cypress Wealth Services, an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. CWS is comprised of professionals with diverse backgrounds and extensive experience and qualifications. CWS is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert and Anchorage, the firm serves clients across the country. Learn more by visiting www.CypressWS.com.