By: Colleen Weber
Estate Planning
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By Colleen Weber, CFP®, CPA
Giving gifts is often more fun for the giver than the person receiving the gift. Some people are better at giving gifts than others and you could even say there is an art to giving gifts. It takes time, consideration and intentional planning to find just the right gift for a particular person. However, when gifting a large amount of money, valuable items, or other assets as part of an estate plan, there are some important things to think about. As a donor, you need to be aware of the tax benefits and rules but also decide what you want to give, who you want to give to, how much, and what method to give. Here are some tips to consider when reviewing your estate plan.
The Tax Benefits of Gifting
There are two important items within the tax code that must be understood by any donor, and they are (1) the annual gift tax exclusion and (2) the lifetime gift tax exemption. The annual gift tax exclusion is the monetary amount that you can “gift” per person per year on a tax-free basis. This exclusion covers an unlimited number of people, and according to irs.gov, the annual gift tax exclusion has gone up to $16,000 in 2022, up from $15,000 for the past few years (double for spouses splitting gifts). (1)
The lifetime gift tax exemption is the total monetary amount that you can give away over your lifetime. Again, these gifts will be free from taxation; however, it is important to note that the overall gifted amount over your lifetime will reduce the amount of exemption that you have at your disposal to shield your estate at the time of your death. In 2022, the exemption is up to $12.06 million due to inflation, but will revert back to $5 million in 2025 if the tax laws don’t change before then. (2)
Mastering the “Art” of Gifting
Now that I’ve covered the details behind the tax benefits, let’s discuss the other side of the conversation, which I am calling the “art” of gifting. This is the softer side, in which the goal is to create strategies that align incentives for all parties involved. Ultimately, I want the donor to feel good about their decision to give, whether it be to their children, grandchildren, or someone else.
How Much to Gift & How to Go About It
There are no rules of thumb around assessing the proper amount to gift or how to align incentives. However, there are several considerations to be aware of when deciding on how much to gift and how to give.
First, you’d want to think about the amount of money that is comfortable for you to gift. For example, if you and your spouse are considering gifting money to your children, what does your budget or assets allow for? Alternatively, if you are a grandparent seeking to gift to your grandchildren, you may want to discuss with the parents what they are comfortable with. In most cases, they will be open to any generous gift, but you never want to overstep any boundaries.
Second, you may want to consider the various gifting decisions. Some grandparents with large families may want to make sure their gifting is done fairly, which, if grandchildren are of different ages, may cause them to shift priorities and amounts in varying years to be gifted out. In addition, whether parent or grandparent, you’d want to consider what assets the donee already has at their disposal. You may gift a different amount to grandchildren with well-off parents than grandchildren with less well-off parents; the less well-off grandchild may not have the means to fully fund college, so you could donate to their 529 plan to make sure they don’t take on student loan debt.
Third, you should consider the purpose of your gift. Is it to fund their college via donating to their 529 plan or is it to make sure they have enough money in their Roth IRA for when they retire? There are limitations to what you can donate to each of those options, so that may dictate the amount to gift.
What to Gift
At the end of the day, there are countless ways to gift something to someone. While a donor has the least amount of control when gifting cash, there are other options. Some were discussed above, but some items that the donor would have more control over how they are used include 529 plans, life insurance contracts, retirement accounts (IRA and/or Roth), stock, medical expenses, and more.
Want to Learn More?
There’s a lot to consider when gifting as part of your estate plan strategy. My goal is to help clients save money on taxes, simplify their financial life, and enjoy the comfort and stability of knowing someone is watching out for them. I would love to speak to you in more depth about the strategies behind gifting, as well as guide you to understand the restrictions, limitations, and associated tax consequences. To get more information on this topic or to find out how I can help you on your financial journey, book a free introductory meeting online or call (952) 470-0750 today.
About Colleen
Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.
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(2) https://www.forbes.com/sites/matthewerskine/2022/01/04/2022-transfer-tax-update/?sh=379d25e32e2e