When meeting with our clients regarding their estate planning and family wealth management, one of the top requests is to transfer wealth to children and grandchildren. While the first thought is often to leave assets in a will or trust, why wait? There are several other strategies that make wealth transfer in the present more beneficial and fulfilling, to everyone involved.
Don’t Wait to Structure Your Family Wealth Management
One way to make sure your heirs receive the fruits of your labor is to transfer wealth now, while you are still alive. Gifting assets and/or money now means you can see how your family uses and enjoys the gift. And perhaps you can help your family when they need it most. It may also reduce or even eliminate estate taxes that your family might have to pay if they received the gift after your passing.
Shifting Your Gifting
When gifting in the present, you are allowed an annual gift exclusion. For 2019, that cap is $15,000 for a single person and $30,000for a married couple. Outside of the annual exclusion, you are also subject to a lifetime gift tax exclusion, currently set at $11.4 million single/$22.8 million married. For any gifts over the annual exclusion limits, you will have to file IRS form 709 and the gifts will go towards your lifetime gift tax exclusion. Gifts above the lifetime exclusion are subject to a federal gift tax, currently 40%.
By IRS definitions, a gift is “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
Gifts of a value under that exclusion are not taxable to the recipient, however gifts above that exclusion are (if the donor does not pay the tax). Other taxable exclusions include gifts to your spouse, gifts to a political organization, and medical or educational expenses (referred to as the medical and educational exclusions).
Depending on your family and situation, a good family wealth management strategy may be to gift each family member up to the exclusion amount each year. This is often called an annual exclusion gift and does not count against your lifetime gift tax exclusion. You can gift to as many beneficiaries as you like, there is no limit and no restriction to actual family.
Gifting Strategies That Have Big Impact Now
Cover daycare costs, pay for a wedding, plan a family vacation, help with a property down payment, or give your child a boost as he or she starts a business. The opportunities to gift are endless and your family does not have to wait for an inheritance.
Another strategy: transfer ownership of investments to your heirs. The timing is especially important on this one, as the value of the gift will fluctuate at the current value, based on the daily market. But this could be a bonus if you bought the investment at a lower price than its current value.
You are likely in a higher tax bracket than your heirs. By transferring an investment, like a stock, that has appreciated, you won’t have to pay taxes on the gain and the new owner receives the taxable dividends. The cost basis also transfers, so if the new owner sells the investment, he or she will pay taxes on the gain based on the original purchase price.
A Family Wealth Management Plan for the Present
With educational exclusions in mind, consider gifting money into a 529 college savings plan. This can be an excellent part of family wealth management, especially transferring wealth to grandchildren as education costs continue to rise. And the best part: you can contribute up to five years’ worth of the allowed annual gift exclusion in just one year. So in 2019, you contribute up to $75,000 per person/$150,000 per couple to a 529 plan.
The caveat is that once you make this gift, you would have to wait five years before gifting to the same beneficiary. Otherwise you could potentially incur gift tax implications. And should you pass away before the five years, the gift could be subject to “recapture,” and thus included in the value of your estate when your estate taxes are calculated.
While the 529 plan was established to be used for qualified college expenses, as of January 1, 2018, up to $10,000 per year per beneficiary can be used toward elementary, secondary, private or religious school.
Help with Medical Costs
Another way to take advantage of exclusions is to assist your child or grandchild with medical costs. As long as the person is not your dependent, you can pay medical bills as a gift. The key is how the gift is structured: payments must be made directly to the doctor, medical office, hospital, etc. and not to your family member. The medical exclusions gift is not subject the annual or lifetime exclusion cap.
If exclusions are not a concern, but you want to dictate how or when your heirs receive their gifts, a revocable gifting trust is a good option, especially for minors who may not be responsible enough to handle large amounts of money. Also known as a living trust, you can maintain control and continuously update the trust as your family and needs change. You would make gifts to the trust instead of directly to the benefactors. Distributions can be customized, such as in a lump sum or in increments. Upon your passing, the trust becomes irrevocable.
Family Wealth Management Tips to Transfer Wealth
Before preparing your family wealth management plan, especially gifting in the present, it’s important for you and your financial advisor to go over a few important questions:
- How much can you afford to give? There is a difference between being generous and sacrificing your own future financial stability for that of your family. Don’t risk your retirement or short-change yourself on what you will need to thrive and enjoy life once you stop working.
- Are you over-giving? Make sure your gifts are as tax beneficial as possible. And that you are not over-giving to your family now so that they will have to in turn support you later. Consider your cash flow and potential cost of living increases.
- Will you gift the same to all of your heirs? Some children and grandchildren may be in more of a financial need now, while others may prefer an inheritance later. Or you could do both. Speak with your family and find out the best way to make gifting fair for all.
The Most Valuable Asset Anyone Has
Think about the gifting in the present strategy as a gift of time. You have time to educate your heirs on managing assets, time to explain your intentions and wishes, and time to answer questions throughout the process.
Wondering about your position to transfer wealth now rather than through an inheritance? Stableford’s integrative advisory services can help you make sure your gifts are advantageous to you, your taxes, your estate plan and your beneficiaries. Contact us at 480.493.2300 to learn more.