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.