By Cheryl Ellefson, CPA, MBT, CFP®
It’s a universally accepted truth: Giving brings joy to both the giver and the recipient. So, when it comes to gifting your estate to family members, why wait until you’re no longer around to reap the benefits? If you give to your children or grandchildren now, you’ll see the relief on their faces after they pay down or pay off debt. You’ll get to hear about—and possibly share in—memorable life experiences or travels. You’ll feel fulfilled knowing you helped them out when you could.
If gifting money to your children or grandchildren is part of your estate plan, here are a few reasons why it might make sense to get started sooner rather than later.
First, make sure you’re comfortable gifting the amount you have
If you’re retired, you’ve likely been focused on saving for decades. It can feel awkward to go against this mindset, especially if you’re on a fixed income. Hence, the number one rule in gifting: Make sure you’re comfortable with your finances before you even think about gifting.
Gain insight into your family members’ spending habits
You can gift up to $15,000 per year per individual before a federal gift tax return filing is required. (U.S. married couples can gift up to $15,000 each to an individual for a total of up to $30,000.) But this doesn’t mean you have to max out your gifting amount each year. In fact, gifting smaller amounts to family members over time has its advantages. Seeing how your children or grandchildren spend the money provides you with insight into how they might spend their inheritance later. That said, remember their priorities might not be your priorities.
Keep your estate below the Minnesota estate tax exemption
Although Minnesota doesn’t have a gift tax, it does have a $3 million estate tax exemption ($6 million for married couples if proper estate planning is done). Although $3 million sounds like a substantial amount, it isn’t all that difficult to reach when you factor in the value of property, life insurance, retirement plans, and savings accounts. The federal estate tax exemption is $11 million ($22 million for married couples) and is to reset back to $5 million ($10 million for married couples) the end of 2025. (Federal is inflation adjusted.)
Minnesota also has what’s known as a “claw-back” provision. This means taxable gifts in the three years prior to your death will be pulled back into your estate. The state will include this clawed-back amount when calculating your estate value. The question becomes: Do you want your government or your family members to get your money? If you prefer the latter, it’s wise to begin the gifting process as soon as possible.
Make a tangible difference in your family members’ quality of life
If you wait until you’re, say, age 85, your children could be ready to retire themselves. But if your kids are at the stage in life where they’re raising kids of their own, making mortgage payments, and paying off student debt, now may be the time where an influx of cash could greatly improve their quality of life.
What’s more, if you wish to help your children or grandchildren out with medical or education expenses, you should keep this in mind: Certain medical and education expenses, if paid directly by you, do not count toward the $15,000 per individual annual gifting limit.
Think through your gifting options
Although gifting money to family members sooner rather than later has its benefits, a gift should never be made on a whim. Putting extra thought into how you’ll go about this important task can help to amplify the joy for all parties involved. At JAK, we understand gifting is a highly personal decision. We’re here to guide you through the process, help you determine the right timing, and connect you to professionals who can put your plan into place. If you have questions or would like to explore your estate gifting options, contact us today.