Many of our clients want to gift their kids and grandkids now, rather than wait for it all to pass to them through their estate. They already are confident that they have enough for their own retirements, and now they want to build more gifting into their plan.
This month, we take a look at year-end giving as a part of your tax-smart financial plan.
1. Getting Your Estate To Your Kids Sooner
More of our clients are helping family now instead of leaving a larger sum later. We love this question because we love the generosity, and yes, life is getting increasingly expensive for young families. Additional money may go a much longer way for a 30-year-old getting started than for a 60-year-old in their peak earning years, when many families inherit wealth.
A few interesting facts on gifting to family:
$19,000 per person, per year. No tax, no form, to as many people as you want.
$38,000 if you are married and you both give to the same person.
Over that amount, you file a gift tax return. If you go above the limit, you don’t owe more taxes–it is counted against your estate tax exemption.
That exemption is $15 million per person right now. You owe gift tax only after you use it up, which most families never will.
This one surprises people who have had the conversation before. Filing a gift tax return and paying gift tax are two different things. You can spread out your “estate” and be around to see them enjoy it!
How You Give Changes the Cost of Giving
Before you begin giving to your kids by writing checks, though, a quick but important note on how you give. We had a client who wanted to max out their gifting this year to several adult children. To do it, they would have been gifting about $60,000. In their case, selling shares to give cash would have:
Pushed them into the next tax bracket
Change how their Social Security is taxed
Raise their Medicare premiums
Use up the room set aside for Roth conversions already planned that year
So instead, we gifted the low-basis shares, which went straight into the daughter's non-retirement account and were sold there. The gain landed on her return instead of theirs. There is more than one way to move the money, and it is not just cutting a check. Ask before anything is sold.
2. Preparing Your Family For Your Estate
An organized transfer takes two kinds of preparation, and most families only do one of them.
Preparing the money for the kids is the part people expect: beneficiary designations that match the will, titling that does what you think it does, and accounts organized enough that someone can find them all.
Preparing the kids for the money is the part that gets skipped. It means the people inheriting it understand what is coming, how it is structured, and why you set it up the way you did.
One thing we do with families is sit everyone down at the same table while the parents are still here to talk:
Here is what we have
Here is how it is set up
Here is how it will come to you someday
The goal is that nothing is a surprise later. When a decision looks strange years from now, the person who made it is not around to explain why, and most of the hard feelings we see after a death come from that rather than from the terms themselves.
Families tell us this conversation is hard to start and harder to explain. That is our job, and we are glad to do it. We will walk your children through the moving parts in plain language: what an inherited IRA requires and on what timeline, how the trust works and who does what, and what the tax picture looks like on their side. We can also meet with your adult children on their own, and be the people they call later when you are not there to ask.
Your heirs should know the plan before they need it, and know us.
3. A New Project from Financial House
We’re still finding new ways to help people understand their finances. We've been working on a new visual representation called "Getting Your Financial House in Order." We hope it will help people understand and visualize how their entire financial life works together through a financial plan.
We have been working on a way to show it. Picture a house with six rooms:
Investments
Insurance
Tax planning
Estate planning
Giving and legacy
Income and cash flow
The rooms generally stay the same through every season of life, even if what is happening in them changes. Your financial house will look different at 55 than at 85. The idea is that the right process and the right partner can help you keep each room in order through life’s many changes.
We’re excited to share more as we work with our marketing partners to share this message. We hope it will make it easier to understand and share the work we do!
One room at a time, the question never gets answered. As a house, it takes one conversation.
More on this soon. In the meantime, Organizing Your Financial House covers the same six areas and asks one question about each: how confident are you that this has been handled, and handled well? Wherever the answer is shaky is where the next conversation starts.
Download the Confidence Assessment
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.