Gifting—the process of giving your assets to loved ones during your lifetime—was once a strategy wealthy investors used to minimize their estate tax. However, with the generous estate tax laws that permanently became part of the tax code in 2010, gifting plans took a back seat in estate planning. While leaving a legacy has become easier, gifting while living allows you to help your family and friends in real-time, exert more control over how your assets are used, and gain personal benefit by witnessing the outcome.
Individuals in the U.S. can give up to $16,000 annually—$32,000 for married couples—to an unlimited number of beneficiaries without incurring gift taxes in 2022. Those amounts increase to $17,000 and $34,000 in 2023. Gifts above those amounts count toward your lifetime estate and gift tax exemption of $12.06 million in 2022 or $12.92 million in 2023 ($24.12 million in 2022 or $25.84 million in 2023 for couples).
We recently worked with a couple of investors in developing a gifting plan to benefit their nieces and nephews, as they had no children of their own. The intended recipients varied in age, financial status, and ability to handle a windfall responsibly. One niece is receiving a need-based scholarship, and a gift could disqualify her from financial aid. One nephew recently rushed into marriage at a young age, which most family members feel won’t last. Another niece is married to a wonderful man and expecting her second child.
Ultimately, we had to remind this couple that it was their money to give away as they choose, and that they should not feel obligated to gift them all the same way or amount. They could choose how much, when, and why to positively impact their lives.
For the most control over how a recipient spends your gift, a trust can usually accomplish your goals. A trust can be funded with either cash or investments and carry stipulations for use. For example, you could specify that trust distributions are only used for education or that the recipient receives a certain amount at specific ages.
However, it is important to remember that trust assets are counted as a student asset in the financial aid calculation. In this situation, for the niece receiving a scholarship, our couple funded a 529 plan to help her with grad school, but they retained account ownership so that it did not affect her current financial aid. For the nephew with a recent marriage, a trust was a good solution, as it only granted him access to money as he got older. The couple decided to work with the niece with an established family to transfer highly appreciated investments into her investment accounts for her retirement.
Ultimately, these investors were able to see their wealth benefit their family members without incurring any unpleasant tax consequences or creating a hardship situation for the recipient.
If you have questions on how you can gift assets that will be in the best interest of the recipient, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the October 29, 2022 “Henssler Money Talks” episode.
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