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Smart strategies for gifting assets

Created date

April 22nd, 2014

If you’re fortunate enough to have assets to pass to children and grandchildren, you may want to make gifts during your lifetime so you get the pleasure of seeing the happiness they bring. But, before you give significant gifts, be certain you have enough money for the rest of your retirement.

“You need to have a financial advisor or accountant crunch some numbers and make sure you don’t give away more than you can afford, because once you give it away, it’s not coming back,” California financial planner Robert Cucchiaro (summitwealthandretirement.com) says.

Cucchiaro says health care costs and inflation are two budget items people tend to underestimate. Once you and your financial planner are comfortable that you can afford to give assets to heirs, then you need to decide how you’d like to make those gifts.

Present interest trusts

Currently, individuals can give $14,000 each year to any other individual without triggering a gift tax. Gifts over that amount count against the lifetime exclusion, which is currently $5.34 million. If you’re giving cash to grandchildren under age 18, Cucchiaro recommends putting the funds into a present interest trust, which enables you to establish guidelines about how it can be spent—say, for education or medical expenses. He says present interest trusts are useful for grandparents who want to pay for private elementary and high school educations, which cannot be funded by 529 plans.

“You don’t want to write a check for $14,000 to a five-year-old,” Cucchiaro says. “You can establish a present interest trust, with mom or dad as the trustee, but you can set the rules that it must be used for private school. That way, you can use your annual exclusion and give a gift to your grandchild, but mom or dad can’t use it to buy a Corvette.”

If you have real estate, say a vacation home, you’d like to give to relatives, it could be best to let them use the property but maintain ownership of it until your death. New Orleans estate planning attorney Molly Sullivan (lalegacylaw.com) says that if you give heirs real estate during your lifetime, they could be hit with a big tax bill.

“Maybe you bought a house 50 years ago for $50,000 and now it’s worth $500,000,” Sullivan says. “If you gift it during your lifetime, your kids would receive it with the original $50,000 cost basis, so if they sold it, they’d have to pay capital gains for $450,000 in appreciation.”

Sullivan says you also should consider the cost of maintaining a property. Things like taxes, repairs, and landscaping add up, and younger heirs may not have sufficient income to cover those costs. She recommends designating proceeds from life insurance to pay maintenance expenses on properties you gift to family.

If you want your heirs to learn about investing, you may want to gift shares of stock. North Carolina financial planner Michael Baker (vertexcapitaladvisors.com) says, in many cases, stock is best passed on through your estate after death. Like real estate, stock retains its original cost basis if gifted during your lifetime, so heirs may owe capital gains tax when they sell it. However, individuals with estates over $5 million may want to gift stock to remove that value from their estates and minimize taxes, Baker says.

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