Financial Gifts to Loved Ones
One of the greatest joys this holiday season can be gifting to loved ones or charities. Before gifting, there are some important things to consider to get the most out of your gift. Consider these questions before finalizing your gift:
How does gifting fit into my overall financial picture and financial health?
Does it make sense to give up this money?
Could it cause financial struggles or issues in the future?
What can you give?
According to the IRS Publication 526 Charitable Contributions, each person can give $15,000 to an individual. Which means a married couple could give $30,000 to each of their children or grandchildren. If you give a greater amount than the allotted annual giving, you will need to file a gift tax return. Click on the link above for more details and always check with a tax professional first.
Capital Gains Tax of the Gift Receiver
If you give cash, generally there are no income tax consequences for the recipient, though there could be gift and estate tax implications. If you give appreciated securities, the capital gains taxes can be significant. One example, say you give $15,000 cash to a grandchild. They get to keep the entire $15,000 and can choose how to use it. However, if your gift is $15,000 of a stock and the recipient sells the stock with a gain, after at least 1 year it becomes a taxable event. After the sale, the grandchild would owe a capital gains tax and possibly state taxes.
Trusts & Custodial Accounts
A trust is a legal document that can help expand your options when it comes to managing your assets—whether you’re trying to shield your wealth from taxes or pass it on to your children. Trusts are increasingly used by families from a range of economic backgrounds, not just the wealthy. Another positive aspect to a trust is that if set up correctly it can be protected from lawsuits, divorces, creditor claims, etc. Another option is a custodial account which allows you to make gifts to an account invested in the child’s name, and the assets in the account can be used for any expense for the benefit of the children.
There are positives and negatives to trust and custodial accounts. Your financial advisor can help you decide which is the most appropriate for your situation.
Give the Gift of Education
A 529 savings account can be a great gift for a grandchild. A big plus with this type of account is that you and your spouse can front-load 5 years worth of your annual exclusion gifts. Together, you could give 5 times the combined total of $30,000 for 2019, or $150,000, to each of your children or grandchildren. In addition, the 2017 tax cuts expanded 529 plans beyond college to now include the ability to fund up to $10,000 in K–12 tuition per beneficiary per year. Definitely consider giving the gift of education to a loved one.
A donor-advised fund (DAF) is a program of a public charity that allows donors to make contributions to the charity, become eligible to take an immediate tax deduction, and then make recommendations on distributing the funds to qualified charitable organizations. By making a large donation to the donor advised fund, you can claim a tax deduction in the year of the gift. However, the money does not need to be granted to a charity in the year you make the contribution. You can let the money grow and you can decide later how the money will be distributed.
Contact Brien Smith, Brien@traditionswealthadvisors.com or 979-694-9100 to help you get started building a holistic financial plan to reach your goals—which may also include strategies to make financial gifts to people and organizations that you care most about.
Fidelity Viewpoints. 3 December 2020. https://www.fidelity.com/learning-center/personal-finance/charitable-giving/giving-money
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