Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Gift Ideas
Published Date : February 19, 2015
For those who want to pursue inter-generational transfers of wealth to assist their family while they are still living, two rather simple techniques stand out for their general ease and effectiveness; annual exclusion gifts and 529 plan contributions. Both offer significant help to children and grandchildren, and provide meaningful estate planning opportunities. Direct gifting may ultimately create control issues when the given funds are released to the child (or grandchild) at the age of majority. And yet, this approach offers donors and parents a wonderful opportunity to teach children responsibility with “their own” money, as well as access to resources for things beyond the higher education objectives of 529 plans.
For example, since housing is financially out of reach for many young people coming of age, steadily accumulating and growing many years of annual gifts provides a real opportunity to help the beneficiary realize this goal of home ownership. By earmarking funds and emphasizing the importance along the way that such assistance should be relied upon for this and other meaningful and desirable goals, the accumulated funds are more likely to be protected from being spent on less worthy pursuits. Regardless of how the gifts are ultimately spent, the donor(s) are still likely to benefit from the reduction in the size of their own estate and beneficiaries will benefit from years of accumulation and returns.
529 plans also offer attractive and simple ways to transfer wealth, especially where funding higher educational expenses is concerned. One of the compelling features of these plans is that the donor(s) can make larger one-time contributions by accelerating up to five years’ worth of their annual gift-tax exclusion amounts. For example, two grandparents could give $70,000 each (the current $14,000 annual exclusion times 5 years) to each and every one of their grandchildren. If two grandparents had six grandchildren, their combined gift could be as high as $140,000 each, thus immediately eliminating $840,000 from their own estate. This strategy is especially attractive to grandparents with multiple grandchildren, plenty of remaining assets to rely upon, and a desire to reduce the tax impact on their estate. Though such gifts are not charged against their Lifetime Exemption amount, they do preclude further annual exclusion gifts to the named beneficiaries for the five years advanced. However, care should be taken about the timing of gifts and condition of the donor, to avoid any potential “deathbed” contributions and funds being pulled back into the donor’s estate.
Still, 529 plans are designed to assist with college or higher level education, and cannot be used to cover potentially expensive elementary or high school tuition. Knowing this (and acknowledging that there may be limits to gifting ability), along with the real possibility that broader assistance may be needed with earlier education expenses or other early life needs of beneficiaries, choosing how best to optimize annual exclusion gifts is important. Furthermore, direct tuition payments at all educational levels can also be made by donors without impacting their annual exclusion gift or their lifetime exemption amounts. Depending upon overall resources, thinking strategically about how to optimize gifting methods is a key ingredient in effective estate planning. Everyone’s situation is different, though, and these general observations are meant to stimulate careful thought about the available choices.
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