Financial Fitness

Gifting Strategies to Help Pass on Wealth

While wills are a common way to distribute assets, there are gifting strategies available that enable you to pass along your wealth before you pass.

by Teri Cettina - August 26, 2019

When it comes to estate planning, many people ultimately use their will or revocable living trust to distribute wealth to loved ones upon death. However, there are a number of strategies to gift assets to your children and other family members now, while you’re still alive.

“Many parents get great satisfaction from helping their children financially while they (the parents) are still around to see the results of their gifts,” says Deborah Lauer, Planning and Life Events Specialist for Wells Fargo Advisors. A bonus: Gifting money or other assets to your children now may reduce or eliminate estate taxes your heirs might otherwise pay later.

Here are some considerations for transferring wealth to your family in the form of gifts:

Use the gift tax annual exclusion to your advantage

Give gifts up to the annual gift tax exclusion threshold —$15,000 annually (or $30,000 per married couple) — to each family member. These gifts are commonly referred to as annual exclusion gifts. In addition, these gifts don’t count against your lifetime gift tax exclusion, which is currently $11.4 million ($22.8 million if you’re married).

Your children could use these gifts to pay off student loans, make a down payment on a house, or even start a business. “Many parents also give money to adult children who are just starting their careers and can’t afford retirement plan contributions,” says Lauer. “The children use the gifts to jumpstart their retirement savings, so the funds have as many years as possible to grow.”

Contribute to 529 college savings plans

If your children are young enough that college is still on the horizon, you can use the gifts to fund 529 college savings plan accounts, suggests Lauer. You can also gift money to grandchildren and other close family members this way.

A nice and unique benefit of a 529 plan, notes Lauer, is that you can contribute up to five years’ worth of your allowed annual gift exclusion — for a total of $75,000 (or $150,000 if you’re married) — into the account in a single year with no federal gift tax. It’s important to remember, however, that in a 529 plan, the money must be used for qualified college expenses in order to avoid being taxed.  Also, as of January 1, 2018, qualified expenses also include up to $10,000 per year per beneficiary for tuition at an elementary or secondary public, private, or religious school. You would need to wait five years after this gift before making annual exclusion gifts to the same beneficiary without potentially incurring gift tax implications. In addition, keep in mind the amount you contribute could be subject to “recapture,” meaning it may be included when calculating the value of your estate for estate tax purposes, if you pass away in the next five years, including the year you make the contribution.

Whatever gifting option you use, talk first to your financial advisor, tax professional, and attorney.

Help with an adult child’s medical costs

If your non-dependent child incurs a significant medical expense that’s not fully covered by insurance, you can pay their bill as a gift. Just make sure you structure the gift correctly.

“You have to make payments directly to the medical provider,doctor, or hospital, and not to your child,” explains Lauer. When you pay a medical bill directly, this medical exclusion gift does not count against your annual exclusion or lifetime exclusion gifting ability. (Your tax advisor can assist you with determining the medical expenses that may be covered by the medical exclusion gift.)

Transfer ownership of investments

This gift strategy is possible but a bit trickier than others, says Lauer because you have to pay attention to the timing of the gift due to potential daily market fluctuations. When you gift securities, the gift value is based on their current value and not your initial purchase price. Your children also retain your cost basis so any future sale may have tax implications for them.

Keep in mind, too, that once you transfer investments to your children, you have no control over whether they hold or sell them, says Lauer. “If the gifts include stocks of a company to which your family has an emotional attachment, you may want to talk in advance about your wishes and your adult child’s plans so there are no misunderstandings later,” she says.

Fund an irrevocable gifting trust

These accounts allow you to gift money to your children in trust (instead of outright), with trust language instructing the trustee as to how the gifts may be used or invested for the child’s benefit. According to Lauer, trusts can be particularly useful if you’re gifting money to minors or adult children who can’t handle large sums of money on their own, or may simply need some time to increase their financial knowledge. Your attorney will draft the trust for you if this strategy makes sense for your gifting program.

Whatever gifting option you use, Lauer strongly suggests talking first to your financial advisor, tax professional, and attorney. Again, this is particularly important if you give any family member assets worth more than $15,000 (or $30,000 if you’re married) in a single year. Large gifts generally require you to file IRS form 709 as they count against your lifetime gift tax exclusion.

An even more important reason to consult with your advisors: “Many parents want to be extremely generous with their children,” says Lauer. “However, you also need to look at your own long-term picture first, to be sure your gifts line up with your overall investment plan.”

Teri Cettina is a personal finance writer based in Portland, Oregon, and a frequent contributor to Lifescapes.

Image by iStock

Additional Resources

It’s never too early to begin teaching your kids how to save for retirement. Here are a few ways to help your children boost their money smarts.

Wells Fargo Advisors does not provide tax or legal advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest