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.
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.
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.
President and Founder, Reich Asset Management, LLC
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.