By Matthew Sivertsen, CFP®, CeFT®
For people who have excess capacity in their own personal financial plan, often the discussion leans toward a conversation on how to gift and pass money to parents, children, or grandchildren while they can see the impact it can have on those loved ones. The first step is making sure they are comfortable with the family members level of financial maturity or overcoming worries that they may spoil their family members or create an entitlement mindset. As well as being comfortable with the initial concerns of giving up control of assets or money ahead of time.
Some of the motivational aspects to do this could be things like helping a family member who has experienced a job loss or who is having a health issue, or is struggling to pay housing costs, school tuition or medical bills, or just merely transfer family wealth and improve the financial well-being of a loved one. Assuming they get comfortable with the overall purpose and have the notion to do it, then comes the planning for how to go about executing the gift. Many people choose to stay at or below the $15,000 amount per person. As an example, two spouses may each gift $15,000 to each child annually without gift tax filing considerations; so that each person would receive total annual gifts of $30,000. In this situation nothing needs to be filed or tracked from a formal IRS perspective.
There are some exceptions that can be made to increase this impact pertaining to education and medical costs. One has the ability to pay unlimited amounts of education or medical costs for someone as long as they pay the institution directly and not the individual. Another favorable exception used is the ability to fund a college 529 plan account for 5 years’ worth of the annual $15,000 totaling $75,000 that could be jump funded into the 529. This 5-year election is made on a 709 gift tax return and then no gifting can be done for the next 5 years to that individual.
Many people do choose just to take some of their excess income, or withdrawals from investment accounts and just give cash directly to their loved ones. This creates the least amount of tracking as the monies are in an after-tax basis for the giver and then received by the receiver with no income taxes due. Sometimes people want to gift appreciated investments like stock or land. In this case, there are special rules that apply with regards to cost basis and depreciation transference rules that make doing this a more complex option.
If someone wants to gift a larger amount than the $15,000 per person amount, that is allowable, but it is important to know how this integrates with the lifetime federal estate and gift tax exemption amount currently set at $11.7 million per individual for 2021. In this case, anything over the $15,000 annual exclusion needs to be filed on a special form 709 on your income tax return that would track and reduce the excess gift from the allowable $11.7 million lifetime exemption amount.
In any case it’s important to work closely with your attorney, accountant, and financial planner to know if you are in a situation to be able to gift to family members, as well as the best strategy to use and how basis and depreciation rules transfer over with the gift (if that applies), or if any formal documentation is needed on the transaction. If you are ready to provide financial gifts to family, contact your TPC team for help navigate your generosity.
Matthew Sivertsen, CFP®, CeFT®, is a Partner/Sr. Financial Planner in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm. Email him at firstname.lastname@example.org.