Posted by: The Life and Legacy Planning Group
The holiday season is a time to enjoy friends, family, and loved ones. Often we consider our life circumstances and may get in the spirit of giving. This is particularly true if you are at a point in your life where you have enough from a financial standpoint. If you are planning on giving money as a gift this holiday season, below are five things to consider.
What to Consider When Giving
Sharing your resources – whether money, vehicles, property, or other assets – in a manner that is both simple and smart- as well as financially prudent– can prove complicated. Accordingly, there are several things to consider such as what the gift is for, the type of gift, and if the gift is for charity. Below are five common scenarios:
- You Want to Create a Foundation or Give to Charity: You do not have to be Bill Gates or Warren Buffet to be charitable. Through a Donor Advised Fund (DAF), which is like a charitable savings account, you can benefit from an immediate tax deduction for any cash or investments placed in the fund. Of note, any money sitting in a DAF must be donated to charity but it can be invested tax free. Notably, from a tax perspective, recent tax law changes makes charitable giving different than in prior years. If you want to get a deduction or want to use your IRA to make the gift and you are over 70 ½, you should seek guidance.
- Grandchildren Need Tuition for College: Consider a 529 College Savings Plan – where the money grows tax free and can also be withdrawn tax free when applied to qualified educational expenses – as a way to save for a child’s future education. There are also tax-free withdrawal benefits for pre-college education, depending on applicable state law. While a grandparent can create an account for a grandchild, contributing to a plan created by the parent can help reduce offsets on any potential financial aid award granted to the child. If your child or grandchild is already in college, consider making payments directly to the institution to avoid gift tax issues.
- Your Car or Boat is Not Being Used: One option is to gift the property, making sure title is officially transferred. You will also have to file a gift tax return if the fair market value of the gifted asset is above a certain amount. If instead, you are passing along the old car or boat worth more than $15,000 to a family member, make sure to let your tax preparer know so they can file any necessary gift tax returns. (You probably won’t owe any gift tax, but filing the return is a way to protect yourself from the IRS). Alternatively, the property may be donated to a charity to receive a possible tax benefit. What the charity does with the property – whether the charity uses it for the organization or sells it at a low price and how much the charity ultimately gets – can affect your tax benefit.
- The Next Generation & the Vacation Home: First, make sure to ask whether or not your loved ones want the home. You may be surprised when they do not want it. In that case, sell the property. If they do want it, however, make sure to work out issues in advance that may arise from the transfer of the property. One way to minimize issues is to transfer title to an LLC and give LLC ownership to the children, spelling out each member’s rights and responsibilities regarding the property. You should also address what happens if someone wants to sell his or her portion. Finally, you should consider excluding spouses from the universe of eligible owners in the event of a divorce. These can be complex transactions, even for seemingly simple circumstances, so always speak with an attorney before transferring property into or out of an LLC.
- Your Children Have Different Needs: Sometimes fair does not mean equal. This is particularly true if your children have different levels of need due to a disability, younger age, or better financial stability. For some children, it may be necessary or advantageous to gift a portion of his or her inheritance prior to your death because of immediate need. Whatever your reasons, the division of your estate is up to you. While you cannot prevent dissatisfaction among your children once you are gone, you can try to minimize these issues. One way is to leave a letter behind explaining your motivations and adding a no-contest clause in the will.
- Consider Tax Basis: If you making a gift of non-cash assets to a non-charitable beneficiary, you need to understand that the beneficiary will get your income tax basis in the gifted asset. That could result in an unpleasant surprise when the donee goes to sell the asset down the road. Sometimes, holding such an asset until death, when it will get a step-up in basis, is wiser than making a gift of the asset during life. Consult your estate planning professional or CPA to get more information about this potential tax trap.
Estate Planning Help
While gifting may be the right thing to do, it needs to be done so that everyone, including you, gets the maximum benefit. The tax implications to you depends upon the purpose of your gift, the type of gift, and whether the gift is to charity. We can advise you on your options under applicable law and what tools you can use so that everyone benefits the most from your generosity.