While gifting within your family can be an effective method for wealth transfer, it’s important to remember that federal tax law regulates your generosity. Specific rules come into play when gift giving, even to those you may be legally required to support (such as a child). To avoid subjecting yourself to unnecessary scrutiny as a taxpayer, or worse paying additional taxes or penalties, read on.  

Following gifting guidelines

As individuals we are only allowed to gift so much during our lives due to the lifetime estate exclusion, as of 2019 $11,400,000 for an individual or $22,800,000 for a married couple. As a general rule, any gift is a taxable gift and included as part of your lifetime exclusion unless it qualifies under one of the following exceptions:

  1. Gifts that do not exceed the annual limit for the calendar year ($15,000 in 2019 to each recipient). A husband and wife pair can gift a total of $30,000 each year to a single individual, through what is commonly referred to as “gift splitting.”
  2. Tuition or medical expenses you pay for someone, as long as the education or medical expenses are paid directly to the institution.
  3. Gifts to your spouse.
  4. Gifts to a political organization for its exclusive use.

In addition, gifts to qualifying charities are deductible for the value of the gift(s) made.

Lifetime Exclusions

There may be times you choose to gift outside of the exceptions, in which case you will begin accruing toward your lifetime estate exclusion. However, giving gifts within these guidelines is a solid way to transfer assets without using up your lifetime estate exclusion. By staying within the boundaries of the exceptions, you can proactively plan to transfer the maximum value to your family each year and avoid filing a gift tax return.

It is important to take care when giving gifts such as cars, housing, furnishings, cash, or securities to accounts in a family member’s name, even gifts made to 529 education savings plans. These gifts may appear to be covered by the exceptions when in fact they are not. Or, they may be assessed a fair market value that exceeds the annual gift exclusion.

Gifts for education

One example of a frequently misunderstood niche occurs when planning for educational expenses. Higher education is expensive, and you may be tempted to save as much as you possibly can to your child’s 529 account. However, contributions to a 529 plan are considered a completed gift to the beneficiary, not direct payment of tuition (an excluded expense). For this reason, keep gifts to the 529 under the annual gift exclusion, or develop an additional savings account under your own name to make excess contributions over the annual limit.

Fortunately, you may frontload five years’ worth of annual gifts to a 529 savings plan without generating a taxable gift (as long as you make no other gifts to that beneficiary in the five calendar-year period);  however you will want to make your accounting professional aware of the need to file a gift tax form with your regular tax paperwork.

Rely on your wealth advisor for strategies

Giving income generating or appreciating gifts is another strategy that maximizes your ability to transfer wealth while avoiding penalties. This is an excellent estate planning tool with the added benefit of reducing your taxable estate. Other strategies may come into play based on your unique scenarios.

During tax time and year round, rely on your SYM wealth advisor and professional CPA to understand the ins and outs of the law and strategize gift giving to your best benefit.

 

Disclosure: The opinions and assumptions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. SYM-101