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 were 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 are like 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 any money sitting in the fund can be invested tax free. Another possibility, is to set up a charitable remainder trust. That would allow you to apply charitable deductions now, still be paid for earnings and income on any investments or rental property, all while ensuring the gift passes to your chosen charity. That said, changes in tax law make charitable giving different from a tax perspective than prior years so you will want to seek you should seek guidance.
- Grandchildren Need Tuition: Consider a 529 College Savings Plan – where the money grows tax free and can also be withdrawn tax free when applied to qualified educational expenses – as a way to save for a child’s future education. While these plans are commonly referred to as “college” savings plans, changes in the tax law now actually allow you to use 529 funds to pay pre-college education (K-12) expenses tax-free. Contributions to a 529 plan by you can also be made tax-free in creatively using each grandparents annual tax exclusion amount, filing gift tax return to claim a lifetime gift exemption, or “super funding” with a lump sum equal to no more than five times the annual exclusion amount. What’s also great is that you can contribute directly from an IRA tax-free and without any early withdrawal penalty. While a grandparent can create a 529 account for a grandchild, contributing to a 529 plan created by the parent may be a better option to help reduce offsets on any potential financial aid award granted to the child. Lastly, you may consider creating a Health and Education Exclusion Trust (HEET) which has the benefit of being more flexible in that it pays for both educational and medical costs for your grandchild. Normally, if your grandchild does not use funds in a 529 plan because they do not pursue college or graduate school or receive scholarships or other funding, they would have to forfeit the amount or take a withdraw penalty and pay taxes. However, with a HEET, funds could also be used to pay for healthcare. With the costs of medical care rising exponentially, and especially in the case of an emergency, this could be a very significant gift.
- Your Car or Boat is Not Being Used: One option is to gift the property, making sure title is officially transfer and filing a gift tax return if the fair market value is above a certain amount. If you instead 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 to claim your lifetime gift exemption to avoid paying the IRS a gift tax. Alternatively, the property may be donated to a charity to receive a possible tax benefit. What the charity does with the property – in other words, uses it for the organization or sells it at a low price – can affect your tax benefit and how much the charity ultimately gets.
- The Next Generation & the Vacation Home: First, make sure to ask whether or not your loved one wants the home. You may be surprised that they do not and, in that case, sell the property. If they do, however, make sure to work out issues in advance that may arise from the transfer of 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 and exclude 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 Kids 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 with solid planning and communication. In California, one way is to write a letter you leave behind explaining your motivations along with adding a no-contest clause to your will and trust.
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. We are also happy to connect you with the accountants and financial advisors we refer to our clients in Orange County and Southern California.
