Smart Moves To Know When Making Monetary Gifts

Congratulations! After years of hard work, saving, and planning, you’ve come to a point in your life where you’re feeling secure enough about your own financial needs to consider making monetary gifts to your loved ones while you are alive.

Multi-generational family is gathered inside around a child to watch her blow out the candles on her pink birthday cake.

Perhaps you want to help your children purchase a home, contribute to your grandchildren’s education, or assist a family member or friend through a rough patch.

There are many ways to gift money or assets to others in the short and long term. But to save yourself and your loved ones from negative financial ramifications, including unexpected taxes, read on about the five most important considerations before making a gift.

6 Reasons To Plan Before You Gift

Understanding what you can gift, how much, and when will help you minimize the surprise side effects of your generosity. For example, you should:

1. Secure your retirement and financial future first.

Before you make any monetary gifts ensure that your financial future is secure. One of the most important gifts you can give to your children is good, personal financial planning for yourself. The last thing you want to do is create a situation where your children have to worry about your financial security. If you have raised your children and they are financially self-sufficient, you have done well for them. Now focus on yourselves so you can determine how generous you can be without compromising your financial security. Talk to your financial advisor about living and health care expenses in the context of your retirement plans to ensure that you don’t put yourself at financial risk. Once you know that what you have set aside for yourself is insufficient, you can start your gift planning.

Older middle-aged couple smiles at the financial advisor seated across the desk from them, talking about monetary gifts.

2. Consider the gift of Financial Planning.

Once you get comfortable with the level of giving you can do, consider what you want to help accomplish in the lives of your loved ones. If a family member is in financial distress, and you simply want to alleviate what you hope to be a temporary problem, then giving unrestricted cash or cash on the condition they use it to pay creditors or whatever will relieve the stress makes sense. If you simply want to make a substantial gift, then consider whether you can help them beyond just the cash. For example, years ago we had a client who said he was giving a substantial sum of money to each of his sons on the condition that they each hired us to be their investment and financial advisor. Both of these young sons learned proper financial and investment planning principles at a young age and did not squander this large monetary gift. We now do this for many of our clients. You are not only gifting a measure of financial well-being, but you are also giving the potentially more valuable gift of a lifetime of better financial decisions and greater economic security.

3. Learn about the benefits (and detriments) of gifting now versus in your will/estate plan.

Gifting now versus later has numerous financial ramifications. For example, anything you give now does not have to go through probate later. Depending on the size of your estate, it could reduce overall transfer taxes including state inheritance taxes, and estate taxes. But, gifting in the wrong way might have adverse tax consequences such as giving away property with a low basis now when (under current law) keeping it and gifting it in your estate could save on capital gains taxes.

 Older middle-aged couple talk to their financial advisor who is seated on a couch with them about monetary gifts.

4. Understand how much you can give.

For 2021, you can gift up to $15,000 per person without filing a gift tax return. In 2022, the limit will rise to $16,000. If you are married, you and your spouse can each make this amount of gift per year to each person to whom you want to make a gift. These limits are per person, so if you have multiple people to whom you want to give, you can multiply these amounts accordingly.

The lifetime exclusion of combined gifts you can make while living and at death (aside from gifts that fall below the annual gift tax exclusion described above) is $11.7 million in 2021, rising to $12.06 million in 2022.

If you want to give more than the annual gift tax limit, you may, but you will have to file a gift tax return, and apply the additional gift amount to that lifetime exclusion. No tax will be due unless your total lifetime gifts go above the lifetime limit.

If you are interested in providing for a child or grandchild’s education. You can “front load” up to five years’ worth of gifts—$75,000 individually, or $150,000 if you and your spouse both gift—into a 529 plan without tax implications (assuming the particular 529 plan allows it). Then, the gift will grow tax-free until the student uses it for school-related expenses.

5. Know the real ramifications of real estate and other assets.

You might be thinking about giving your home to your children. Always make sure you consider the step-up in cost basis. You may be giving them a huge financial tax burden instead. Here is an example of how step-up works:

Older middle-aged couple talk to their financial advisor in his office about monetary gifts.

a. You bought a house for $50,000 many years ago.

b. Today it is worth $500,000.

c. If your children inherit it, the house’s basis is increased (stepped-up) to the fair market value ($500,000) at your death, and they only pay capital gains on the appreciation gained after you died.

d. If your children are gifted the house while you are alive, they do not receive the step-up and will have to pay capital gains on any amount over the original $50,000 purchase price (plus what you can document you paid for capital improvements) when they sell the home.

This step-up in cost basis rule also applies to securities and other capital assets. Therefore, always speak with a financial advisor when deciding between gifting now or gifting via inheritance later.

Also, when thinking about gifting your home or other assets, you may want to speak with an elder care attorney before doing so to help avoid any potential future nursing home claims of divesting assets.

6. Consider creating revocable and irrevocable trusts for children or grandchildren.

Trusts are created by you and your attorney to transfer assets to a trustee who will hold onto them for the trust’s beneficiary. You can set up the rules of the trust for your situation and desires.

For example, an irrevocable trust can potentially avoid estate taxes and probate and can set up the terms of the inheritance for the beneficiaries. Also, it can be managed and distributed during your life or after death, and they can potentially be used in strategies to protect assets from creditors There are many aspects of an irrevocable trust that you cannot change once it is established.

With a revocable—or living—trust, you can change the terms or dissolve the trust at any time up until your death. Unlike a will that doesn’t become active until death, the trust is active as soon as it is signed and funded. It can even handle your affairs if you become incapacitated. It does not avoid income or estate taxes. While you are alive, it does not protect assets from creditors, but it can be set up to protect assets, to a degree, from the beneficiary’s creditors.

You have a lot of things to think about if you’re ready to develop a monetary gifting strategy or plan your estate. It can be confusing and it can be easy to make a mistake with your hard-earned resources. That’s why it’s an excellent time to speak with a financial advisor. At Stonecrop, we enjoy helping clients build a plan that reflects their wishes while keeping their future secure and controlling taxes.

Finding The Right Strategy To Benefit You And Your Loved Ones

While many financial advisors pay primary attention to the dollars and cents of your retirement, at Stonecrop Wealth Advisors, that’s only a piece. To help clients maximize the life they want to lead with the financial assets at their disposal, we focus on the life each of our clients wants to lead, what they want to accomplish, and what is most important to them. If you maximize your dollars and do not live the life you want, we do not consider that a success.

As a full-service financial and investment advisory firm that works with both families and non-profit institutions, we help our clients connect what is most important in their lives to the planning of how best to use their money. Then, we take our client’s resources and put them on a path towards a more prosperous future.

If you would like to find out more about Stonecrop and our financial planning services:

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We look forward to sharing more about how you can have retirement and the options you want.


    Doug MacGray

  • DATE

    February 18, 2022


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