Jun 2, 2016

Tax Savvy Giving

When you get to the point in your life when you would like to consider gifting assets, most people begin to ask themselves: how does giving impact my overall estate strategy? How will this affect me from a tax perspective? Do I have enough to begin transferring assets now or should I wait until I’m gone and it becomes a part of my overall estate?

For those considering transferring assets, first evaluate your current withdrawal rate on assets and determined that you have enough assets to sustain your preferred lifestyle should you be blessed with longevity. This step should take into consideration a multitude of factors and it’s when your qualified financial planner should provide guidance.

Secondly, weigh the pros and cons of gifting in advance as opposed to waiting until death. Under federal law you can give up to the $14,000 a year tax-free. Any gifts beyond this amount annually must be reported on a special gift tax form to the IRS. These reported gifts are tracked over your lifetime and gifts in excess of the lifetime exclusion limit, currently $5,340,000 over a donor’s lifetime will incur a 40% federal gift tax. In Washington and Oregon there is currently no state gift tax, but you should take your state into consideration if you live elsewhere.

For example, if you are a married couple with 6 grandchildren, here’s how you could take advantage of the $14,000 exclusion. You and your spouse could each give up to the $14,000 annual tax free amount per grandchild. If you did this over a 10 year period, you are giving $168,000 per year for a total of $1,680,000. None of this gifting will count toward your lifetime gift tax exclusion and recipients do not pay income tax on your annual gift. If you wish to give more in a short period of time, to help with something specific, such as the down payment for a house, you can always give $14,000 in December of one year and give another $14,000 in January of the next year. It is important to note that when recipients reach age 21, in most cases, they will then have access to those funds without restriction.

Although many of these gift tend to be in cash, consider also the opportunity to gift appreciated assets that may have large capital gains such as stocks, ownership in a business or property. Keep in mind that you will need to have a place or way to transfer them.

At death, if your estate will be subject to estate tax, gifting now rather than at death could save you about 45% at current rates in federal and state estate tax.

At First Pacific Financial, we often evaluate these types of strategies for our clients. There can be many factors to consider in your individual situation and these should be carefully understood and evaluated before making this a long term strategy.