that is the question. Or maybe, more accurately, the question is ‘how’ to give. At least once a month I receive an email that reads something like this:
Serra,
I was talking to my friends at work. They are gifting to their children. Do you think I should be gifting to my young kids? How do I gift to them? Why?
Thanks.
My suggestion is to start with the ‘why.’ Why do you want to gift to your children (or grandchildren, nieces, nephews, you-fill-in-the-blank)? Some clients want to gift money to their children to pay for their education while others want to put money aside to help the child purchase a home in the future. The question may be: Why do you want your children to have money?
Before you answer the question, here are the ground rules:
- Annual Exclusion. Each year you can only give an individual a certain amount of money without triggering a requirement to file a gift tax return. In 2015, the amount you can give to any one individual is $14,000. In the real world, this means if you wanted to give your son $150,000 for a down payment on a home in California, then $136,000 is subject to gift taxes. (Of course, you have a gift tax exemption—meaning in 2015, you can gift up to $5,430,000 without having to pay a tax but you still need to file a return).
- Present Interest Gift. You must make a “present interest” gift. A present interest gift is an unrestricted right to the immediate use, possession, or enjoyment of property. 26 CFR 25.2503-3. This can be tricky when giving to minors. You can’t write a $14,000 check to a six year old, well, you can but he can’t cash it. Therefore, you must gift to either a trust or a special account approved by the IRS (Uniform Gift to Minors Account or 529 Account). With a trust, you establish it yourself and determine the trust’s terms; however, special accounts have specific regulations.
- Estate Tax Exemption. At your death, if your estate exceeds the federal estate tax exemption amount (and any applicable state estate tax), then your estate will be subject to estate taxes. In 2015, the exemption amount is $5,430,000 and the tax rate is 40%. Oh, by the way, if you gifted beyond your annual exclusion amount each year, your estate tax exemption amount is reduced by the amount of your lifetime gifting.
Here are the easy-answer scenarios:
- In 2015, your estate exceeds $5,430,000 and you intend to leave your estate to individuals (as opposed to charities). Then you want to start gifting your annual exclusion amount, $14,000 per year, and possibly more.
- Your estate exceeds the estate tax exemption amount or probably will soon because you have assets that will appreciate significantly. Think start-up, pre-IPO. You want to seriously consider gifting your stock now while it is worth $1/share and before it is worth $400/share.
- You intend to give your child or children a significant amount of money for the purchase of a home or to start a business and you do not want to own that home or business. Remember, your gift cannot exceed the annual exclusion amount without filing a gift tax return. In the Bay Area, it takes many years of giving before your gift will equal the down payment on a home.
Every other situation needs careful evaluation. Gifting depends on the ages of the donee and donor, the types of assets the donor intends to give, and the reasons behind the gifting. For example, if a beneficiary is going to inherit a significant amount of money on the death of the donor, wouldn’t it be prudent to teach the beneficiary about managing money now? This can be done with a well-prepared trust. Additionally, if a grandparent wants to provide for a grandchild’s college education, the grandparent can make annual gifts to a 529 plan. The money can grow in the 529 plan during the grandchild’s life and even if the grandparent is no longer alive. When the grandchild reaches college age, the grandchild will have the money for his education.
So, how do you decide whether or not to gift? You discuss gifting with your estate planning attorney. Explain to your attorney why you are thinking about gifting and then discuss the options that would work best for your family.
