Parents can see the positive impact of their giving through tax arbitrage, giving cash (within limits) or directly paying for school or medical expenses.
Most of my clients would rather give during life. They would rather help their kids with a down payment in an impossible housing market, help fund their grandkids’ education or simply seeing a positive impact a gift can make.
Unfortunately, it is often less tax-efficient to give during one’s lifetime however there are some strategies that can help solve that problem.
- Using Tax Arbitrage to assist with maximizing your gift.
The main reason it is often more efficient to give at death is because capital assets “step up.” That means if I buy a stock for $10 and it goes to $90, my kids can inherit that stock at $90, sell it for $90 and pay no taxes. That is not the case for assets given during life.
If you give someone a stock during your life, that $10 basis will be carried over. So, if the recipient sells it for $90, there is an $80 capital gain. BUT, if your kids have taxable income under $47,025 (single), or $94,050 (married), their capital gains tax rate is 0%.
If they’re early in their career or are students, or their income falls below those thresholds for any reason, they can turn around and sell that stock without gain. Be careful here that the sale doesn’t push them into a taxable position.
2. Give cash (check, bank transfer, etc.) above or below the annual gift limit.
The gift tax exclusion is essentially the amount you can give without it counting against your lifetime gift allowance. And, most importantly, you don’t have to report it. That amount in 2024 is $18,000. It gets even better for married couples as the parent can give each of them $18,000 each year as well as the spouse. This is called “gift splitting,” meaning each spouse can give each of their children $18,000 without it counting against their lifetime exclusions. For example, if a couple has two daughters, they can give $36,000 to each girl for a total of $72,000 each year. It’s important to note that if you do make a split gift, you must file IRS Form 709, a gift tax return.
If you’re feeling charitable toward your kids, you can also go over the gift limits but you will need to report the gift, as above, on 709. No tax will be paid, but any amount over the annual limit will count against your lifetime exclusion. This used to be of consequence for almost all of our clients. The lifetime federal exclusion in 2024 is $13.61 million (per person) so it impacts a small fraction of the folks that it used to.
3. Make direct payments to College or for Medical Expenses.
Your oldest grandchild is heading off to college and you have decided to help and give your daughter a check for the first semester’s tuition at the Stanford University. DO NOT DO THIS! As you have now unnecessarily crossed the annual gift threshold. The proper way to assist is to give money directly to educational institutions or for medical expenses without it counting against your annual gift limit or lifetime exclusion. The most important part of giving money to your kids is not the tax ramifications. Most importantly, you need to determine the impact on the gift to that child. There is an adage that a gift to a child can either be quicksand or a rope. If you’ve determined that it will actually help your kids in the long run, you need to ensure you can afford it.