Gift giving is a natural part of the holiday season. You want to give your kids and grandkids meaningful gifts. Beyond just toys and trinkets, you may want to give them significant financial gifts, whether it’s in the form of cash, stocks or other assets. If you are planning to give monetary gifts, it’s important to be smart about how you handle it. Your taxes, their taxes and other factors will come into play.
For the purpose of this article, we’re not talking about a Christmas card with $100 bill stuffed inside. We’re referencing bigger financial contributions that will help them now or in the future. If you have a long-term financial plan developed, you will know what money you need to set aside for retirement and you will also likely have a plan for what happens to your money after you die.
The first thing to understand is how estate taxes work. As of 2019, an individual is able to transfer a total of up to $11.4 million to their heirs free of federal gift and estate taxes. Married couples are able to transfer twice that much ($22.8 million total) tax-free. These amounts apply whether all the money is transferred upon death or during a lifetime.
For any amount more than this, your estate will pay 40% in federal gift and estate tax. Likewise, if the assets are given to grandchildren, there will be an additional layer of tax known as the generation-skipping transfer (GST) tax of 40%. These taxes are in effect through 2025, so the regulations and numbers may change after that.
A smart financial plan will allow you to develop the best possible gifting strategy. You can take care of your children and grandchildren while still putting enough money away for your desired retirement lifestyle. In some cases, it may make sense to spread out the financial gifts over time rather than waiting until you die. There are strategies you can implement and moves you can make to minimize the overall tax liabilities for yourself and your family.
Certain gifts you give will not count against your gift and estate tax exemption total:
Annual Exclusion Gifts – The annual exclusion allows you to make tax-free gifts up to a specified dollar amount to as many individuals as you want each year. In 2019, the exclusion amount is $15,000 for individuals and $30,000 for married couples. This can save you a ton on taxes if you spread out your gifts strategically.
Medical & Educational Gifts – Another way to offer tax-free gifts is by paying for educational or medical expenses of a child or grandchild. You would make payments directly to the medical services provider or education institution on their behalf. These gifts are not taxable and do not require the filing of a gift tax return.
For any gifts larger than the annual exemption amounts, you will need to file a gift tax return (form 709) and the money will be counted toward your total estate tax exemption amount. Larger gifts such as property can still yield larger tax savings in the long run if done during your lifetime as opposed to after death. Talk with your financial advisor or tax specialist to make sure you are doing things right and maximizing your tax savings with any financial gift to children or grandchildren.
There are many other factors to consider and strategies you can implement for smart gift giving that minimizes tax liabilities for everyone involved. For help in putting together a sound financial plan that involves taking care of your heirs, contact Illumination Wealth today. Let our expert financial planners help you develop a plan that is best for you and your family.