With the end of the year quickly approaching and generosity in the air, it’s a perfect time to revisit your plans for giving gifts of cash and assets to your family. Careful planning can help you benefit someone in need, as well as round out your own tax and estate strategies.
We’ve already taken a closer look at techniques for charitable planning and giving, and how they can reduce your taxes while helping a cause or organization that’s important to you, so now let’s look at how we can make a difference in the lives of your family members.
But before we cover the benefits and methods of family gifting, remember that the financial benefits for the donor and recipient will vary with each strategy, depending on each party’s tax situation, as well as state tax laws and the size and layout of the gift giver’s estate. It’s prudent to schedule a discussion with your financial advisor, tax professional and estate attorney to review your plan if you have any questions or concerns.
If you do decide to gift money or assets to family members, here are some strategies to consider and how they benefit everyone involved:
Cash Gifting
This is a classic strategy for keeping wealth within your family, while ensuring it benefits more members. It’s as easy as making an outright cash gift, bank transfer or writing a check.
Limitations: For the tax year 2023, the IRS has increased the limit of the annual gift tax exclusion to $17,000, per recipient. Spouses can combine their exclusions for a total of $34,000 for the tax year 2023.
But these increases are only temporary. Unless extended by Congress, they’re scheduled to revert to lower limits in 2026, which only further accentuates the importance of proper estate planning.
While the IRS generally considers any gift to be taxable, gifts less than the annual exclusion or gifts given to your spouse are generally exempt. (Gifts to your spouse are eligible for the marital deduction.)
Keep in Mind: If you’re splitting gifts with your spouse, or if you’d like to give more than the annual exclusion to one recipient, you’ll need to file a gift tax return using IRS Form 709, even if gift tax is not payable. Gifts exceeding the exclusion are tallied against your lifetime gift and estate tax exemption.
However, gifting your assets now, rather than waiting until you pass away, can have two advantages. You can enjoy seeing your loved ones benefit from the gift, plus the gifted assets could also increase in value—and could decrease your taxable estate.
Paying Down Tuition or Medical Expenses Directly
Limitations: The major limit to this gift is the size of the bill that’s being settled. Generally, gift tax exclusion amounts don’t apply to donors paying off tuition or medical expenses for family members.
Keep in Mind: You’re still free to give the recipient a separate tax-free gift up to the limit of the annual gift tax exclusion ($17,000 in tax year 2023).
Gifting Appreciated Assets
If you have a stock or other property that has a large unrealized capital gain, you can give that security without having to pay the tax on the capital gain, but it will involve some coordination with the recipient, who may be responsible for paying taxes on the gift.
Limitations: There’s no free lunch for situations involving capital gains. Gifting appreciated assets means the recipient will be responsible for paying any capital gains taxes, but if the recipient has a much lower income both parties can minimize the total taxes owed.
Keep in Mind: The IRS considers any transfer of property or interest in property for “less than adequate and full consideration” to be a gift, which could necessitate filing IRS Form 709. Appreciated assets include things like the deed to a house, and investments in equities or bonds.
Fortunately, there are many options available for giving cash, assets or financial freedom to family members. But some gift tax thresholds are only temporarily increased, while others require careful planning. To better understand your gift giving options, reach out to Odyssey Group’s experienced financial advisors.
