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Run-time: 02:55 How can you provide gifts to immediate or extended family members while minimizing the taxes associated with those gifts? Get quick insight on different gifting options that work for your financial goals.
Interested in sharing your financial success with younger loved ones? This is a generous idea, but it is important to be aware of some key considerations before making such a gift. Keeping these three factors in mind can help you avoid unanticipated tax consequences and reap all the intended financial benefits of your gift.
- Limits. Currently, an individual can gift either during their lifetime or at death, approximately $5.4 million without paying any estate tax. This is known as the estate tax credit. However, there is an annual exclusion that you can take advantage of each year. This exclusion allows you to gift up to $14,000 per individual per year without reducing the overall estate tax credit. This is a great way to enhance your gifting above and beyond lifetime limits.
- Timing. When do you want to make your gift – during your lifetime or at death? There are pros and cons to giving a gift while living. The upside to making your gift while you are still living is that the amount is taken out of your estate, so it can remove considerable asset value and subsequent appreciation from your estate. Another plus is that you will experience the enjoyment of seeing the recipients use the gift. A downside to a living gift, however, is that when it is taken out of your estate there is no turning back. The funds are gone and cannot be used for your future living expenses as you age. An additional downside to a living gift is that the basis of the gift to the recipient is the same as the donor. If the same asset is transferred at death the recipient gets a “step up” in basis to fair market value. Depending on the asset this could result in a significant difference in gains recognized and the tax when sold.
- Method. You should consider whether or not you want to gift the funds directly to your loved ones. Often times, gifters are concerned about giving a large financial gift directly to a young person as they may not be mature or sensible enough to use the money for its intended purpose. This is where a trust can help. RKL’s tax professionals often recommend putting the gifted asset into a trust so the funds cannot be accessed until the age you designate. This provides some comfort that the money will be secure until it can be used wisely. Another option, if your recipient intends to pursue higher education, is to use your gift as a contribution to a tax-free 529 college savings plan. This savings vehicle allows contributions to grow tax-free provided they are ultimately used for qualified higher education expenses.
Gifting is a financial maneuver that is very specific to your financial situation. When making decisions and plans, it’s important to talk to an advisor about your unique needs and concerns. RKL has a deep bench of professionals who work with families and individuals to develop detailed estate plans that help them accomplish their financial goals. RKL is here to help – contact us today to get started.
Contributed by Michael R. DePaul, Jr., Esq., partner in RKL’s Tax Services Group. Mike specializes in strategic planning and compliance for corporations, partnerships and individuals, as well as services involving estate and financial planning for individuals. Mike is licensed to practice law in Pennsylvania and also has significant experience representing clients before the IRS, state administrative boards and various state agencies.