Many seniors who have been financially successful in life question whether they should gift money to their children, or other potential heirs, early versus leaving an inheritance. Honestly, there is no easy answer to this question. Each family has unique needs and is in very different circumstances. Even among intended recipients there could be many reasons to gift early, or to not gift at all.
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Let’s start with some very basics. For 2021, the IRS allows you to gift up to $15,000 per recipient annually without the donor running the risk of incurring gift tax. Are you married? You and your spouse could each gift the same recipient for an annual total of $30,000. Even if you go over this limit, it’s unlikely you’ll owe gift tax. Why? The IRS allows you to gift up to $11.7 million over the course of your lifetime. Double that if you are married. It requires an extra form for your tax preparer, but the overage is generally reported when you file tax and is deducted against your lifetime total limit of $11.7 million (double if married). By the way, these amounts do get adjusted from time to time so if you are reading this after 2021, be sure to check the current guidelines. Starting in 2026, the exclusion amount is scheduled to drop to pre-2018 levels so plan now!
If you have a large estate and are worried about estate tax, meet with a CFP® or estate planning attorney and start working on ways to reduce your estate. Again, these current high levels are scheduled to revert to pre-2018 levels effective 2026. By gifting now, you could enjoy seeing some of that money put to good use while you are still living and reduce your estate. If you know you have enough to gift, but not quite at the $11.7 million level, you can relax for now and focus on whether to gift and how much. There are some considerations for gifting while you are alive.
First, you need to know exactly what you have and how much. You definitely do not want to set a gifting plan in place that will be unsustainable, or worse, leave you short of money in your golden years. Keep in mind that you don’t know what the future holds, how your health may change, your living arrangements, or if you’ll need extra cash for a crisis. Bottom line, do not gift what you cannot afford to gift.
Next, you need to be honest with yourself about who you are gifting to. This is a tough one because it involves your heart and your head. The two need to reach agreement. For example, you may have a wayward child that cannot control their life, doesn’t understand money, or may have addiction issues. You need to know if gifting will truly help this person and enhance their life, or if gifting could exacerbate any problems (for example, drug use, gambling).
A further consideration is family dynamic. Let’s say you have three children; one is quite successful, one is struggling financially and can’t seem to keep employment or a roof over their head, and the third one is holding a job but has serious behavioral and adulting issues. How on earth do you decide how much to gift to each one, or even who to gift to? This is where the heart and head need to reach agreement. It’s also where a family meeting (or a few) will be necessary if you decide to gift money while living. Keep in mind that your children’s problems will not magically change if you die and suddenly leave them money. Either way, the issues need to be addressed whether through family counseling or the use of a control mechanism such as a trust, or combination thereof. Actually, establishing a trust could give you more control over your gifting. This would depend on the type of trust and the conditions created.
The mechanics of gifting also need to be considered. How much will you gift? If it’s to your children, does each recipient receive the same amount? If not, you will need to be very clear in explaining this to your children. Will the amount be an annual, monthly, or quarterly gift? How will you be delivering that amount to the recipient? If you do not want to write checks or electronically transfer funds, a trust may be needed with a trustee. That could be an extra, ongoing cost so consider carefully.
Gifting early could bring you, and your recipient, great joy. Your generosity could improve the recipient’s life immeasurably. It’s also an area that requires a good amount of thought and planning before lodging into a gifting plan while living. If you want to start a gifting plan, or haven’t done any financial planning, click here to start. Hiring a financial planner, especially a CFP®, is a crucial step to financial health and wealth building. Let me help you take that step.
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