Financial Gifting: Taxes, Insights and Strategies

Michael Mechler CFP® CBEC®, December 15, 2020

When you have extra money, it can be gratifying to share your good fortune with family members and help support their dreams and goals. But gifting — whether you’re giving cash, stocks or other assets — has specific rules and regulations that can impact your financial situation. This overview shares important points you should know.

Financial Gifting

Gifting amounts and tax guidelines

The following are general guidelines regarding federal income tax rules applicable to gift taxes. However, we recommend that you seek advice from a qualified tax professional on the tax implications of gifting based on your personal circumstances.

  • Individuals can generally gift up to $15,000 to any number of recipients annually (who don’t need to be relations). With gift splitting, a husband and wife could each gift $15,000 to one child, for a combined total gift of $30,000.

  • Gifts over $15,000 to an individual other than your spouse generally require a gift tax return.

    • The excess amount of the gift applies to the donor’s lifetime gift tax exemption, which is $11.58 million for 2020. For example, if you gift $25,000, then $15,000 is excluded from your lifetime exemption, and the remaining $10,000 will go toward your lifetime exemption.

    • Always consult your CPA to determine if an annual gift tax return must be filed, as there are certain other instances that may require an annual gift tax return to be filed. For example, making a gift of property under the $15,000 annual exclusion of property utilizing valuation discounts.

  • Under Internal Revenue Code section 529(c)(2)(B), you can make a lump-sum contribution to a 529 plan of up to five times the annual gift tax exclusion (or $75,000 in 2020) if you elect to spread the gift evenly over five years and provided you make no other gifts to the same beneficiary during the five-year period.

  • If you make payments directly to an educational or medical institution, there are usually no gift limits. For instance, if you pay a $50,000 tuition bill directly to a university for your grandchild, you may still be able to gift that person $15,000 in cash without needing to file a gift tax return.

Pros and challenges of gifting

The primary reason most people decide to gift money is simply to help a loved one. But you may enjoy additional advantages, too. The utilization of an individual’s annual exclusions can be an important part of an estate planning strategy to help reduce the value of your estate and your potential estate tax liability.

However, there are also many complexities and considerations that should be discussed with your tax professional prior to implementing a gifting strategy. For example, considerations may include items such as the basis of the assets being gifted, and whether the recipient would benefit from the gift today with carryover basis versus a step up in cost basis to heirs at the donor’s death.

It is important to remember that, with gifting, you will also reduce your current assets. So, you need to be confident that you won’t need that money for yourself before you give it to someone else. Ideally, you should consult with your financial planner to assess your current and expected future financial picture before making substantial gifts.

Gifting strategies

Straightforward cash gifts are the most common approach, but you can gift virtually any type of asset, including real estate. You might plan annual gifts to specific individuals or choose to support a specific goal or special occasion, such as a home down payment or a wedding. Other strategies include gifting contributions to a 529 plan, using trusts or leveraging family limited partnership interests.

To learn more about how we can help clients interested in gifting strategies, please talk with your Private Banker. Since gifting can be a complex topic that touches on many aspects beyond your financial plan, you should also consult with your tax, legal and estate professionals.

 

The information, views, opinions, and positions expressed by the author(s), presenter(s) and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

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