By SJS Senior Advisor & Managing Director Jennifer Smiljanich, CFP®.
You'd like to experience the joy of gifting to your children and grandchildren during your lifetime. You'd like to be able to put a smile on the face of your child who is struggling to make ends meet. You are concerned about potential changes to estate tax laws and whether that may impact how much of your estate goes to Uncle Sam. Do any of these situations strike a chord with you?
In the last year, we have heard from many clients who would like to explore how they can make gifts to family members without affecting their own financial security. Some worry about potential tax changes, and how those may affect what legacy they can leave to future generations.
We have helped families create and implement gifting strategies for the past 25+ years. We are glad to help offer guidance to you and explain possible gifting options. Please note that all of the below gifting options apply to both children and grandchildren.
Gifting Money Directly
Each year, an individual may give up to $15,000 (for 2021) per child - or up to $30,000 for a child and their spouse - without using up any of the individual’s lifetime gifting limits.[1] A couple may gift a combined $30,000 per year per child, or a combined $60,000 to a child and their spouse.[2]
If an individual were to die in 2021, they could leave up to $11.7 million ($23.4 million for couples) to beneficiaries without paying federal estate and gift taxes.[1] There is discussion that these high estate and gift tax exemptions might be on the chopping block; President Biden has proposed decreasing estate and gift taxes levels to those last seen in 2009: $3.5 million per person for the estate tax, $1 million for the gift tax, and a top tax rate of 45%.[3]
Gifting For Specific Purposes
Tuition And Medical Expenses
Many parents want to gift money for specific purposes, instead of gifting cash with no limitations on potential uses. For example, there are some exceptions to the annual $15,000 gifting limits, including:[1]
Tuition for someone else
Medical expenses for someone else
Education Account: 529 Plan
To help pay for your child’s future education costs, you can create a 529 plan with your child (or grandchild!) as the beneficiary, and then donate to the 529 plan subject to gift tax rules. 529 plans can be invested in broad-market mutual funds, and can grow tax-free and penalty-free as long as withdrawals are used for the beneficiary’s qualifying education expenses.[4] A donor to a 529 plan has the ability to "frontload" gifts of up to five times the annual gift tax exclusion. However, if the donor were to pass away before the full five years, a portion of their gift could be added back into their estate and may result in gift taxes.[5]
Retirement Account: Roth IRA
You can also help your child save for retirement: as long as your child earns enough taxable income (but below the Roth IRA income limit) and has not contributed to a Traditional IRA or Roth IRA for the year, you can contribute $6,000 (2021 limit) directly to your child’s Roth IRA each year.[6]
Gifting Appreciated Securities
Generally, gifts can be made in cash or using appreciated securities (stocks, bonds, mutual funds, ETFs). Gifting highly appreciated securities to someone in a lower tax bracket may result in lower taxes for your family as a whole.[7]
Family Loan
If you want to help your child but don’t want to gift money, you can instead loan money. This may help your child get a loan for a specific purpose at a lower interest rate than third-party loan vendors may charge. To ensure the loan’s legitimacy, the IRS mandates that any family loan must have a signed written agreement, a fixed repayment schedule, and a minimum interest rate (you can use Applicable Federal Rates as the minimum).[8] If the loan exceeds $10,000 or the loan recipient uses the money to produce income (such as investing in stocks or bonds), you will need to report the interest income on your taxes.[8] We recommend that you consult with your tax advisor.
Summary
Parents often tell us: “We want to give our children enough so that they feel they could do anything, but not so much that they could do nothing.“ The better you manage your finances, educate your children on financial topics, and plan your specific gifting strategies, you may not have to gift as much as you think to help give your children all sorts of opportunities.
As always, we are here to help you go over gifting strategies, and help you choose and implement the best strategies for your family situation. If you have any questions or just want to talk with us about gifting strategies, please feel free to reach out to us.
Important Disclosure Information And Sources
[1] “Frequently Asked Questions on Gift Taxes“. IRS, irs.gov.
[2] “Will You Owe a Gift Tax This Year?“ ElderLawNet, 06-Mar-2021, elderlawanswers.com.
[3] “IRS Announces Higher Estate And Gift Tax Limits For 2021“. Ashlea Ebeling, 26-Oct-2020, forbes.com.
[4] “Topic No. 313 Qualified Tuition Programs (QTPs)“. IRS, irs.gov.
[5] “Do You Have to Pay Gift Taxes on 529 Plan Contributions?“ Mark Kantrowitz, 28-Jan-2020, savingforcollege.com.
[6] “Roth IRAs“. IRS, irs.gov.
[7]“How to Give Stock as a Gift (And Why Tax Pros Like The Idea)“. Chris Davis, 15-Dec-2020, nerdwallet.com.
[8] “Family Loans: Should You Lend It or Give It Away?“ Schwab, 24-May-2019, schwab.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
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