Gifting

Strategies for gifting today

There are many options for gifting to loved ones.  The goal of a long-term financial plan is to save and invest enough so you can fund their lifestyle and live comfortably in retirement. Additionally, the hope is to be able to leave a legacy to their loved ones and community.

Do you gift now or upon your death?

There are many scenarios in which it makes sense to begin transferring wealth while you are still alive. When it comes to gifting during your lifetime, it is important to take care of your own retirement needs and goals first. We recommend robust coordination with your financial advisor and estate planning attorney first to ensure that gifting is not to the detriment of your financial plan and retirement. As they say on an airplane, always put on your own mask first before helping others!

As of 2020, a person can transfer $11.58 million ($23.16 million for a married couple) at death or during their lifetime without triggering federal gift and estate taxes. Individuals and married couples are allowed to make use of their entire estate tax exemption while they are alive. If an individual does not use this full exemption while they are alive, the remainder can be used by the executor of your estate to reduce, or even possibly eliminate, the estate taxes triggered by the implementation of the estate plan.

Estate tax level

The estate tax exemption level is not set in stone. The current level will sunset on January 1, 2026, and revert to pre-2018 levels, barring congressional action. To give some historical context, here is a brief history of the changes to the exemption:

  • 2002: raised from $675,000 to $1 million
  • 2004: raised to $1.5 million
  • 2006: raised to $2 million
  • 2009: raised to $3.5 million
  • 2010: raised to $5 million
  • 2012-2017: Increased yearly in accordance with inflation, resulting in a $5.49 million exemption in 2017
  • 2018: raised to $11.18 million
  • 2019-2020: Increased yearly in accordance with inflation, resulting in today’s exemption of $11.58 million

A handful of states also impose their own estate tax and often have exemptions that differ from the federal exemption. As of 2020, the estate tax exemption in Minnesota is $3,000,000. Information on all 50 states’ estate tax exemptions can be found here.

Trim the size of your taxable estate

Regardless of the size of your estate, there are strategies that are important to understand that can help you to trim the size of your taxable estate without using up your estate tax exemption. In 2020, individuals are allowed to give up to $15,000 per year to anyone ($30,000 for a couple) without using up any of the aforementioned estate tax exemption. You are allowed to give more than $15,000 to an individual in a given year, however, the excess over that limit will use up part of your estate tax exemption and must be reported through filing a gift tax return.

Outside of the $15,000 annual exclusion, there are other ways to gift without using up your lifetime exemption. There are no limits on the amount of a gift in the following situations: charitable contributions to qualified organizations, paying the tuition bill of a student, and paying the medical bills of another person. To utilize the latter two exemptions, the funds must be paid directly to the institution and not to the individual that you are assisting.

Other options for gifting

In addition to direct cash gifts, there are other vehicles that are an option for you to give to your loved ones. Uniform Transfer to Minors Act (UTMA) accounts are a way to give to a minor child. The account is held in your name until the child turns 18 or 21 (varies by state), at which time the account is automatically signed over in full to the child. Another way to help a minor child is setting up a 529 college savings plan. This can be a great tool because you can make five years’ worth of gifts without using any of your estate tax exemption. This means that an individual can give $75,000 to a 529 plan in a year and a couple can put in $150,000. If that is done, no additional gifting can be done into a 529 plan for that beneficiary for five years. Both of these options can have an impact on college financial aid so one choice may be better than the other, depending on the child’s specific situation.

Community legacy

If you would like to begin leaving a community legacy during your lifetime, some options include donor advised funds and charitable trusts. Donor advised funds are charitable giving accounts that people most commonly use to accelerate donations into one year for tax purposes, but then spread out the actual charitable gifts over many years. Charitable trusts are designed for you to set aside assets for your charitable endeavors as well as yourself or other beneficiaries. This can be a great way to leave a legacy for both your beneficiaries and your community.

Gifting strategies are unique and personal for everyone

Depending on your situation, you may wish to give to your loved ones frequently while you are alive. This can be broken down into direct gifts and gifts for which you have more control. For others, the wish may be to hold off on transferring any part of the estate until the end of their life. Additionally, others may wish to keep all of their assets and transfer them out of the family upon death. Regardless of what your thinking is in regards to your estate and gifting, it is important to understand the many possible ways to accomplish your family goals. Articulating your estate plan goals and wishes to your financial advisor and attorney is the first step towards creating an estate plan that is best for you and your family. Clear expression of your wishes will allow your financial advisor and attorney to formulate a plan that will execute those wishes.

The foregoing content reflects the opinions of Wealth Oaks Wealth Advisors, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.