By Beth Pinsker
Some wealthy individuals are moving hundreds of thousands of dollars out of their estates, either all at once or over time
For most people, holiday giving doesn’t require a disbursement of funds from a financial adviser, but for the wealthy, this time of year is all about making structured gifts to family and charity.
This is not about a $50 check from Grandma. These gifts are likely to bump up against the current $18,000 annual gift limit or even go beyond it.
Some wealthy individuals are moving hundreds of thousands of dollars out of their estates and into the hands of younger family members and nonprofits, either all at once or over time. Sometimes this is a tax strategy, and sometimes it’s just done for the joy of giving. And it’s likely to happen more in the coming years: A recent survey of wealthy individuals from Schwab showed that 97% of millennials plan to give money while they are still alive, along with 98% of Generation X.
Giving away large sums of money is not so easy, however. There are tax rules involved that affect both the giver and the receiver, so strategies need to be planned carefully. That’s where financial advisers often get involved.
“We very closely track the gifting that our clients do,” said Brian McGraw, a certified financial planner at Hightower Wealth Advisors in St. Louis. “If we know they’re spending everything they need to and they still have so much left, we show them how much they could give their kids now and see them enjoy this money.”
To be tax-smart about giving to individuals, givers have to be mindful of the IRS annual gift-tax exclusion, which is $18,000 in 2024 and $19,000 in 2025. A person can give that amount to as many different people as they’d like in a year without filing paperwork with the IRS or paying taxes on it. A couple can give double that amount.
If an individual gives more than the allowed amount, they don’t necessarily owe any taxes. They just have to file the proper form with the IRS to say they’re using some of their lifetime federal estate-tax exclusion, which is now $13.6 million and will be almost $14 million next year.
“The IRS does not really have gift police, but if they look back, you could have real problems if you haven’t filed the forms properly,” said Ashley Weeks, a wealth strategist with TD Wealth.
That being said, that individual would likely still not owe anything. “Even if people don’t file the form, it’s not likely that they would have had a tax issue,” said Eric Bronnenkant, head of tax at Edelman Financial Engines. “I encourage people to follow the IRS requirements, but even if they didn’t do so, they are not likely in the situation for it to cause a tax liability.”
Gifts to charity are more flexible, but to get the most tax benefit out of them, givers have to be mindful of which account they draw from and what assets are given.
Here are some of the top strategies for giving money as a gift.
Write a check
Just write a check for $18,000 and put it in a nice card? “It doesn’t happen as much as you’d think,” said Stash Graham, an asset manager based in Washington, D.C., who says that out of around 900 clients, maybe 25 have annual gifting plans. “It’s a very standard process when it does happen. They’ll call us or send an email and say they want to send $18,000 to their kids.”
Terry Rasmussen, the chief executive of Thrivent, said her mother gave annual gifts up to the limit for her grandchildren while she was alive, all for the joy of giving. It was so important to her that even when she was declining and could barely see, Rasmussen would bring her the checks and hold her finger to the place where she was to sign.
One word of caution: Make sure any check gets deposited by the end of the year, or it could mess up next year’s giving. “If you wrote a check and they didn’t cash the check until after the new year, then that’s the gift for that year instead,” said Jere Doyle, an estate-planning strategist for BNY Wealth. This is one reason why he likes to have people make gifts at the beginning of the year. (Another reason is to not miss out on giving the gift if you die during the year.)
If an individual is over 701/2 and giving to charity, then they should put down the checkbook altogether. If there is money in an IRA, they could save on taxes by making a qualified charitable contribution directly to the charity from their IRA.
Give highly appreciated stock
In some cases, it can be better to give away highly appreciated stock. It’s especially tax-savvy to give this kind of asset to charity, because the giver can get the deduction and doesn’t have to worry about anyone paying ongoing capital-gains tax on growth. But they can also give stock to younger family members.
“If the next generation is in the 0% to 15% capital-gains tax bracket, then we are leading our clients to give them highly appreciated stock, like Amazon (AMZN) or Nvidia (NVDA),” said Nicholas Yeomans, a certified financial planner based in Georgia. “If you think it’s a really excellent stock, maybe encourage them to hold on to it.”
Pay for education costs
Money paid directly to a qualified educational institution or medical entity does not count toward the annual gift limit or the lifetime estate-tax exclusion. So an individual can pay as much toward tuition or orthodontia as they want to for a loved one without considering any of the rules – and it can be an easy transaction.
“It’s another way to get more assets to your family above and beyond the annual gifting,” said Julie Virta, a senior financial adviser with Vanguard Personal Advisor Services.
An individual can also make an annual contribution up to the limit into a 529 college savings plan, or front-load five years’ worth all at once. “If the client is possibly subject to the estate tax, that allows them to quickly give a larger amount of their wealth away, and if the kids are closer to college, it gives that a boost and gets the account growing,” McGraw said.
Give a down payment for a house
For some wealthy families, the annual gift limit does not matter, because they’re planning to help with bigger purchases anyway, like making the down payment on a house. Bank of America’s head of wealth strategy, Katie Carlson, worked with a family that evened out the money they gave a son to help with medical school by helping a daughter buy a house.
“There’s a whole family-dynamics element to all of the gifting,” Carlson said. “That same family is leaving a vacation home on the East Coast to the daughter, where she lives, while giving the son who lives in California other assets.”
Susan Hirshman, director of wealth management at Schwab, had a similar situation with a family where the parents had helped out one child with the down payment for a house and promised to also help out a younger child when they were ready to buy a home. When the time came, housing prices had gone up so much that the purchase required a much larger gift. So the parents went back to the older child and gave them more money.
A note of caution regarding giving money for a down payment: Make sure the recipient can keep up with the mortgage payments. “If you’re going to offer this gift, you have to make sure they are buying them a home they can afford on their own, in case the gift stops,” said McGraw.
Pay for a wedding
Parents and grandparents are also often tapped to pay for weddings. In wealthy families, this can constitute a large gift that goes up to or past the annual IRS limit. Yeomans said he worked with a client recently to fund a grandchild’s wedding. “They are giving up to the limit of $18,000 by gifting securities to the 23-year-old to sell,” he said.
Match a Roth IRA
If it seems too open-ended to just give money, one way to help instill financial literacy in members of younger generations is to match their Roth IRA savings. For this, a minor child needs earnings – real income from work, up to $7,000 – which could mean that they have a job or that the giver employs them to do some justifiable task. “The No. 1 thing is to work with an accountant and be on the same page,” said Yeomans.
Make a loan
If a person was worried about the permanence of giving, or about family taking their gifts for granted, they could start with intrafamily loans. “Instead of outright gifts to a child, you can lend to members of your family at well below market rate,” said Weeks. “You can then forgive a portion each year, up to the gifting limit.”
Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put “Fix My Portfolio” in the subject line.
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-Beth Pinsker
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