Many families routinely gift assets to heirs and some plan to leave assets to heirs above the amount the government allows to pass free of gift or estate tax. When it comes to estate planning there are both simple and complex ways to reduce your estate. Here are a few simple gifting ideas to consider.
Making Annual Exclusion Gifts
The IRS agrees that tracking “small” gifts is too much of a hassle, so they elected to create annual exclusion gifts. This exclusion allows $15,000 (in 2021) per recipient per year to be given away in cash or property value, without reducing your ability to shield future wealth transfers from tax using your lifetime exemption and without having to file a gift tax return. This is an incredibly effective tool for families to transfer wealth to their loved ones without being penalized with a gift or estate tax (or the hassle of filing a return). In addition, your loved ones don’t have to recognize the gift as income on their own returns, a common misconception.
For example, a couple with four children and six grandchildren may transfer a total of $300,000 a year to these 10 members of their family. The couple can give each family member a check, securities, or fund a new or existing 529 college savings plan. Keep in mind, while this is an example of a family member bestowing gifts to their children and grandchildren, a gift can be made to any individual and still fall under the exclusion.
Caution – Loved ones should cash their checks, receive their stock or certify that a 529 plan provider has deposited the gifted funds before year-end, or the gift will not count for that tax year. You should also be mindful that the annual exclusion is cumulative, so you need to consider the value of all transfers you make during the year to each recipient when looking at your ability to give $15,000.
Give the Gift of Compounding – for College
Get started growing tax-free savings for college by funding a 529 plan. The couple in our example above could use their annual exclusion gift to contribute to a 529 college savings plan or take advantage of the special rule that allows up to five years of annual exclusion gifts to be lumped together to kick-start or significantly boost a loved one’s college savings. These college savings plans are great because they grow tax deferred and distributions used for qualified tuition and fees are income tax-free. However, any gains on contributions not used for qualified higher education expenses are subject to income taxes and a 10% penalty, so be sure not to over fund the 529 plan with more than you think your children or grandchildren will need for college.
Give the Gift of Compounding – for Retirement
The couple in our example could alternatively use their annual exclusion gift to kick-start a loved one’s retirement by contributing to a new or existing Roth IRA. If your loved one is working, consider the benefits of a Roth IRA for retirement. Roth IRAs grow tax-deferred and qualified distributions after age 59½ are income tax-free. The power of compounding is exponential when combined with starting young, tax-deferred growth and tax-free retirement distributions. In 2021, your employed children/grandchildren can use $6,000 of your annual exclusion gift to fund a Roth IRA, reduced by any other contributions to an IRA they made that year. To be eligible, your child/grandchild must have earned at least $6,000 in 2021 and not more than $125,000 (if single) or $198,000 (if married) or the contribution amount may be limited.
Stuff Their Stocking
Make someone a part owner in a company that they love. For younger loved ones, it could be an educational exercise, teaching them about the stock market and public companies. Stock makes a great gift because (1) it allows you to reduce your estate by the fair market value of the stock (up to $15,000 in 2021), (2) it reduces your future potential income tax liability as any embedded gain in the position is not realized upon transfer (but rather transfers to your loved one), and (3) it jumpstarts investing for your loved ones. Giving shares of stock is also a great way to reduce your exposure in a concentrated position and is a great way to remove future appreciation from your estate if you believe you are holding a company that will appreciate highly in the future. It also frees up cash for other liquidity needs. If you want to purchase a new stock for someone, physical shares of stock can be purchased online through websites such as Giveashare.com. If the site doesn’t have what you are looking for, consider buying (or giving your own shares) through your brokerage firm. Over the years, this systematic gift-giving can drastically reduce an estate and maximize the tax-free transfer of wealth.
Spread the Wealth
Ask your loved ones how they would best like to make a difference in the world and make a donation to a charity in their name. If you have a donor advised fund, consider giving a “Gift for Giving” that allows them to give an amount you determine from your donor advised fund to a charity of their choosing. Alternatively, Amazon Smile has made it easier than ever to give to charity by providing the option to donate a portion of qualified purchases to a charity (or charities) of your choice, with the same conveniences as Amazon Prime. For more information on the best ways to give to charity, read our piece on Thoughtful Charitable Giving.
Paying Education and Medical Expenses for the Benefit of Loved Ones
Annual exclusion gifts are not the only option when it comes to strategic estate tax techniques. You can also chip away at your estate by covering loved one’s qualified expenses. These include anything from qualified education expenses such as tuition, books and fees to medical expenses such as doctor or hospital visits or even insurance premiums. There is no limit to the amount of qualified education or medical expenses you can pay since they do not count against the $15,000 annual exclusion gift. Let’s go back to the couple utilizing annual exclusion gifts in the example above. They are planning to gift $300,000 in annual exclusion gifts to their children and grandchildren. On top of the planned $300,000 in gifts, they can also easily pay $100,000 in tuition costs for their grandchildren and perhaps another $100,000 in medical expenses within the family, making their annual wealth transfer over $500,000 a year, tax-free!
Caution – If you are going to pay for education or medical expenses, be sure to make your check payable directly to the health care provider or educational institution. You should also confirm with your tax advisor that the payments you intend to make are in fact qualified educational or medical expenses.
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
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