Should I Start Gifting Money (or Even My House) to My Kids?
As for giving away your money while you’re still alive to see it go to the ones you love, there are pros and cons to think about. But when it comes to your house, giving that away is probably a really bad idea.
When thinking about estate planning, inevitably comes the question of where will I leave my assets when I'm gone? Once you've decided who gets what, who will be your executor/executrix and who will be your power of attorney or trustee comes a deeper question: Would I rather leave my assets to them now or when I'm gone?
While most people plan for where their assets go when they're gone, not as many have thought about giving away some of those assets while they are still alive. Today I thought we'd explore the pros and cons of giving away your assets while you're still alive.
Whether you should give away some of your assets today depends largely on what type of asset it is and, of course, whether you may need those assets in the future. I always suggest starting with a financial plan to determine how much of your assets you will likely need for yourself in retirement. Future unknown expenses, such as health care or possibly long-term care, can derail even the best of plans. Once we know that we have covered all the possible health care issues, then we can best determine what you can safely give away without it causing you harm in the future.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How Much Money Can You Give Away? A Lot!
I believe this information is timely because, while we currently are able to give away $11.58 million per person in 2020 — going up to $11.7 million in 2021 — this federal exemption amount will automatically revert to $5 million (adjusted for inflation) in 2026. Personally, I think it might change well before then if a new administration decides to change the current laws. As a nation, we are $27 trillion in debt, and therefore have to get tax revenue from somewhere. The estate tax seems like an obvious target. Therefore, now is probably a great time to consider gifting assets.
Gifting can be done on a small scale or a much larger one. For those looking to make smaller gifts, you can currently give anyone you want $15,000 per year ($30,000 jointly for married couples). These gifts are not taxable to the recipient, which is why it makes a great place to start. Likewise, you can pay for college or medical expenses for anyone, in any amounts, as well. Beyond these options, additional gifts would begin to count against that $11.58 million per person allowance.
What about Your House?
As you can see, outright monetary gifts are easy to address. Where it becomes more complicated is when you start to give away property or your “stuff.” People used to want to give away their house to their kids so that it could be "protected from the nursing home" or from "taxes when they die.” This is almost always a bad idea.
For example, in our area of New Jersey, many people purchased their home for a very modest sum long ago and have watched it appreciate to almost unimaginable prices. Say for example you bought a house for $20,000 back in the 1950s and now it's worth $2 million. Not an uncommon scenario at the Jersey Shore. If you were to pass while owning that property, under current tax law, your heirs would receive a "step up" in cost basis to the fair market value of $2 million upon your death. If they then sold it the next day for $2 million, there wouldn't be a gain and therefore no taxes to pay on the sale.
If, instead, you gifted the property to your heirs now while you’re still alive (and never added to the cost basis during your lifetime) then when they went to sell the house for $2 million they would recognize the cost basis that carried over from you, which was $20,000, and they would have to pay tax on the gain of $1.98 million. That is a huge tax to pay that could have been easily avoided. Be careful about giving away assets other than money during your lifetime.
There are other issues, as well, with gifting a house during your lifetime since it could be subject to creditors or your heirs during your lifetime. There are too many other issues to list here but know that there are numerous problems with outright transfers of property during your lifetime.
The Bottom Line on Gifting
So, should I gift my kids money now or later? If you've determined that you have enough funds and you'd prefer to help them now while you can see all the good that it can do, then yes, now may be a great time. If you are looking to give away assets to avoid them being subject to the claims of a nursing home, then you want to stop right here and consult a qualified elder law attorney.
Seeing all the good your assets can do to help your heirs can be very gratifying, and if they are good stewards of the gift, it may urge you to continue giving in the future. If they aren't good stewards of the money, then maybe you should consider a trust, etc. in order to help them manage it better. Either way, after consulting with your adviser about your wishes, your next call should be to a good estate/tax lawyer or CPA to help you make smart decisions regarding the gifts.
As always, if you need a recommendation, just let me know, and I'd be happy to pass along a few names.
Disclaimer
Securities offered through Kestra Investment Services LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services or Kestra Advisory Services. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
T. Eric Reich, President of Reich Asset Management, LLC, is a Certified Financial Planner™ professional, holds his Certified Investment Management Analyst certification, and holds Chartered Life Underwriter® and Chartered Financial Consultant® designations.
-
How to Help Your Kids Without Ruining Your Retirement
Here are some general considerations to ensure the gift of assets to your kids will not negatively affect your financial future.
By Mario Hernandez Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
How Annuities Can Help You Retire Early and Delay Social Security
Waiting until 70 to claim Social Security benefits can pay off, so how do you bridge the gap between giving up your paycheck and filing for benefits?
By Ken Nuss Published
-
How to Get Your Kids to Step Off the Gravy Train
A surprising number of young adults live with their parents. Setting some financial ground rules could get the kids out on their own faster.
By Neale Godfrey, Financial Literacy Expert Published
-
Spring Is a Good Time to Clean Up Your Finances, Too
While you’re decluttering your home for spring, consider taking a crack at cleaning up your finances and old paperwork, too.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Is Your Retirement Solution Hiding in Plain Sight?
Here’s how to use your home equity in combination with an annuity contract to produce late-in-life income.
By Jerry Golden, Investment Adviser Representative Published
-
How to Choose Your Trustee or Executor of Your Will
Above all, you should choose someone you trust, keeping in mind that acting as a trustee or executor can be a complex, thankless and sometimes long-term job.
By John M. Goralka Published
-
Three Steps for Women to Take Control of Their Finances
These strategies are especially for women who are new to managing their money because of divorce or the death of a spouse.
By Emily Glassman Published
-
How AI Can Help Take the Emotion Out of Investor Decisions
AI-driven recommendations can complement human judgment, leading to more rational choices that aren’t as influenced by biases and blind spots.
By Francis Geeseok Oh Published
-
Can You 1031 Exchange into a REIT?
No, you can't, but two other REIT-like alternatives let you defer capital gains taxes while giving you exposure to institutional-quality real estate assets.
By Daniel Goodwin Published