Have you ever thought about how good it would be to have done such good planning that you spent your last dollar the day you died? Even better—you write your last check to the mortuary . . . and that check bounces!
Some of our clients think this way, but the majority would like to leave something to their children and, more importantly, to their grandchildren. Many clients want to help their children now so they can enjoy watching them use the money—and be sure they use it wisely. Plus, the children typically need the money now more than they will need it when they receive the money as an inheritance. Of course, we don’t recommend that you give away money that you might need to take care of yourself. However, we have clients who are confident (and we are too) that they won’t need the funds for themselves.
So if you decide that making a gift makes sense, what is the best way to give your children money? Let’s review some basic rules first. In 2016, you can give up to $14,000 to anyone (including children) and not have to file a gift tax return. This means that you and your spouse could give your child and his/her spouse up to $56,000 and not have to file a gift tax return. You can actually give up to $5.45 million and still not pay gift, inheritance, or income taxes; but you have to file IRS Form 709. There is no limit to how much you can give your spouse as a gift or as an inheritance. It’s called the Unlimited Marital Deduction.
Now back to the real world, where the vast majority of people don’t have to worry about how to give away $5.45 million! Here is a summary of the two main types of gifts and the tax implications of each:
• Cash: Cash is a great gift, primarily to the person receiving the gift! The good news is that your child will not have to declare the gift as income for tax purposes. The bad news is that you can’t deduct the gift on your income tax return. You simply have a smaller, potentially taxable, estate.
• Gifts In-Kind: When you make a gift in-kind (e.g., stocks, mutual funds, real estate), the cost basis for taxes is the same for the person receiving the gift (donee) as it was for the person giving it (donor), including the holding period that determines short- or long-term gain. When the donee sells the property, he/she will list your cost basis and pay taxes on the difference between the cost basis and the sales price. Hopefully, the donee is in a lower tax bracket so that the taxes will be lower—especially if he/she is in the 15% (or lower) marginal tax bracket and qualifies for the 0% long-term capital gain rate. If the donee is in a higher tax bracket—or if the property is currently showing a loss—it would be better for you to sell the property and just give cash.
The tax calculation is more complicated—and confusing—if the property is worth less than the donor’s cost basis at the time the gift is made. Therefore, my recommendation is to NOT give property unless it has appreciated.
One of the reasons I recommended one of my clients giving appreciated property was that the property was paying dividend income. His son was in a lower tax bracket, so even if his son didn’t sell that property right away, the dividend income was shifted to his son’s tax return.
Another good reason to give appreciated property would be if the property has the potential to appreciate a lot more. It might be better to have that appreciation occur in your child’s estate, rather than in your estate.
If you have any questions regarding the benefits of making a gift, please send your questions here.
