Q. My wife and I have worked very hard and have managed to save a nice sum of money in both retirement and non-retirement accounts. We have four children, two are doing pretty well financially and the others are doing OK but I know they are struggling. My wife thinks we should keep everything even and either not do anything now or gift to all four at the same time in the same amount. I think we should help those struggling now when they need it and even everything out via our estate planning documents. In other words, upon our death, we’d just leave more assets to the two children to whom we have not gifted. Is there a limit to how much we can gift in any one year without causing our children to pay tax on our gifts?
A. There is no right or wrong answer to your question about when and to whom to gift. In my opinion, if you have enough money that it won’t jeopardize your financial future, including unknown health issues, I would gift evenly. Most of us don’t know the details of our children’s financial matters. The children you think aren’t struggling financially may well have financial issues of which you are unaware. It’s also common for adult children to need more financial assistance in their early years than later in life. If you decide to make things even upon your death are you going to factor in the time value of money? Assuming a 3 percent rate of return, if a child is gifted $14,000 today and you die 30 years from now the future value of that gift is close to $40,000.
Staying within the $14,000 gifting limit of present interest (meaning the recipient can immediately use the gift) property or cash to any one individual is the simplest approach to gifting. Fourteen thousand dollars is the current “annual exclusion” amount; any amount above this counts against your exclusion from gift or estate tax. Anybody can gift to anyone; it doesn’t have to be a child or a relative and if the present interest gift value is $14,000 or less in a calendar year there is no reporting requirement and there are no tax issues for either the donor or recipient. Regardless of the value of the gift, the recipient is not responsible for any tax on the gift unless the donor’s cost basis of the gift is less than the value of the gift. If this is the case, the recipient may owe long or short term capital gains tax when the gifted property is sold.
Since you are married, you can “gift split” and jointly give away as much as $28,000 to an individual. So, if you and your wife want to gift to a child and to their spouse you could gift $28,000 to each or a total of $56,000 to the couple in one year gift-tax free and remain under the annual exclusion. With that said, a married couple may have to file a gift-tax return if they combine their annual exclusions to gift-split. This may be avoided if each spouse writes a separate check from their individual accounts or from their joint account. A tax professional can help you determine if you and/or your spouse needs to file a gift-tax return to make what’s called a gift-split election.
Currently, the federal gift and estate tax exclusion is $5.34 million (sometimes referred to as the unified credit or lifetime gift tax exemption). If your gifts exceed the annual exclusion you must file a gift tax return and if these gift amounts exceed $5.34 million you could end up owing gift tax of up to 40 percent on those amounts. Even if your gifts over the annual exclusion don’t exceed $5.34 million they will reduce the amount you can pass estate-tax free upon your death. The gift tax return allows the IRS to know how much of the $5.34 million tax-free lifetime exemption amount you have used prior to death. IRS form 709 is used when filing a gift-tax return. Gift tax returns must be kept indefinitely since the lifetime exclusion from gift tax and any gift tax paid is cumulative and your heirs will need them to calculate tax, if any, on your estate.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624