Should you give gifts during life or wait until after death? Giving your loved ones monetary gifts during your lifetime can be an emotionally fulfilling gesture. Whether giving to children, grandchildren, or your chosen family, such a gesture can provide your loved ones with added financial security and may help open the door for new opportunities. Your gifts can help your loved ones invest for the first time, pay their way through college, buy their first home or start a business. By giving monetary gifts during your lifetime, you can benefit from seeing how your gifts impact the people you care for. Lifetime giving can be a gift that keeps on giving!
However, it’s important to keep in mind the rules and regulations surrounding monetary gifts and to consider the possible avenues you can take, for example, a gift of cash or property. If you’re interested in giving to your loved ones during your lifetime, there are several ways to do so, and the choice is dependent on what works best for you and your family. Here are the basics of what you’ll need to consider before giving a lifetime gift.
What is a monetary gift, according to the IRS?
How does the IRS define a monetary gift? According to the IRS, a gift is a transfer of any type of property by one individual to another for free or for less than the property’s market value. This includes money, land, real estate, vehicles, life insurance and other assets.
Different types of gifts
There are two basic ways you can give your loved ones a lifetime gift:
- Giving a gift outright. Gifting outright can be the simplest way to transfer ownership of your assets. This could be a simple monetary gift like handing someone a cash-filled envelope. More complex gifts could include giving a car or a house to a loved one.
- Giving a gift with reservations. Some gifts can be given where the person giving the gift retains some ownership or rights to the gifted property. For example, adding a child as a joint owner of a bank account or joint owner of your house. A life estate can be used to give your home to another person at your death while reserving the right to live in the house during your lifetime.
Whether you give a gift outright or give a gift with reservations, there are important benefits and risks to consider. Before you make any gifts, you should discuss your plans with your tax, legal and financial advisors. This coordination will help you make sure you have considered all of the issues and understand how the monetary gift will affect your plans.
Considerations to make when giving lifetime gifts
Is a monetary gift or property gift right for you and your family? Here are some key points to consider when giving monetary gifts:
- Use your annual exclusion: The IRS allows a person to give a limited amount each year without having to file a gift tax return or pay any gift taxes. This is known as the annual exclusion and the amount periodically changes because it is indexed for inflation. In 2022, a person can give up to $16,000 without filing a gift tax return. This limit is per person receiving the gift and the gift can be given to anyone. For example, you could give a monetary gift of $16,000 to each of your ten closest friends. Couples can double their annual gifts through gift splitting. So, in 2022, you and your spouse could give $32,000 to each of your ten closest friends.
- Give gifts directly: If one of your loved ones is attending an eligible education institution, you can cover their tuition without it being a taxable gift. This can help your loved ones avoid student debt. You can also pay for qualified medical expenses without triggering gift taxes. This can help your loved ones receive the care they need without suffering financially. IMPORTANT: Be sure to give directly to the educational or medical institution on behalf of your loved ones. If you give a monetary gift to your loved ones to reimburse them for educational or medical expenses, that gift will count against your annual exclusion and any amount above the annual exclusion will require filing a gift tax return. By making the payments directly to the educational or medical institution, you can make unlimited amounts of monetary gifts to benefit your loved ones without needing to pay gift taxes or file a gift tax return.
- Consider the risks: Many people think adding their children to bank accounts or to the title of the family home will make it easier to navigate incapacity or death. Some people also consider giving their house to one or more of their children in order to qualify for Medicaid. However, these strategies come with risks that should be considered before taking this step. When you add another person as a joint owner or give them property outright, they now have legal rights to the property. They could withdraw all of the money in your bank or investment account. If you add one or more of your children to the title of your home or give them the house outright, your house could be at risk if they are sued or divorce because your house would now be considered as part of their assets. Imagine losing your house because your child is in a car accident and is sued for medical bills!
- Tax considerations: All About That Basis! Giving property during life can have tax consequences for the person receiving the gift. Let’s look at a simple example: You bought your house for $100,000 and it is now worth $1,000,000. Your basis in the property is $100,000. If you were to sell the house, you would have a $900,000 capital gain. If you give that house to your daughter during your lifetime, she inherits your basis. If she sold the house you gifted her for $1,000,000, she would have a $900,000 capital gain. However, if she inherits the house at your death, she would receive a step-up basis. Her basis would be the value of the house at the date of your death. If the house was worth $1,000,000 at your death and she sold it for $1,000,000, she would have no capital gains. Further, putting your daughter on title could create gift tax issues.
Benefits of giving to family
There are a number of benefits to giving property or monetary gifts to your family. One of the major benefits of giving to family: love! If you give a gift during your lifetime, you can see your loved ones benefit from your gift and share in their joy. And, you may be giving when your loved ones could really benefit from the extra resources. This can be immensely rewarding!
You may also want to consider your children’s needs and how a monetary gift could affect family harmony. Unequal gifts to family can lead to discord unless you openly communicate your reasons. Consider what you want the gift to accomplish, for example: pay off student debt? Help with a pricey medical bill? Once you consider the unique needs of your family, the more rewarding your gift will likely be!
Many people think that giving monetary gifts during life means giving it all up right away, or not at all. That’s not the case! You can decide to give monetary gifts in any amount. Just consider if the gift is in your best interest and within your financial means.
The bottom line
Deciding between giving lifetime monetary gifts or waiting until after death is a personal decision. It’s all about finding the balance between helping your loved ones and still honoring your own wishes. Be sure to consult with your tax, legal and financial advisors before making any final decisions!
