Q Dear Rick:
I’m a widow with two sons who both help me with my financial affairs. Currently, I have Social Security and my deceased husband’s pension that more than covers all my living expenses. In fact, every month I accumulate money. I own my house free and clear and I have no debts. Currently, I have CDs and mutual funds in the total of about $400,000. I recently sold some property that our family owned up north and after real estate commissions I netted a little more than $100,000. My sons don’t want the money but I want to gift it to them. I was told I could not do this because of gift taxes. My question to you, is there any way I could give each my sons $50,000 without having to pay any taxes?
A Dear Susan:
I think it is very generous what you’re doing and what I think is particularly nice is that you’ll get to see your sons enjoy your gift. In that regard, yes, you can gift the full amount to your sons without having to pay any gift taxes.
Our gift tax laws are a little screwy in the fact that it is not the person who receives the gift that has to pay the taxes but rather, it is the person who gives the gift. Our gift tax laws are geared so that very wealthy people won’t pass their money on to future generations without having to pay taxes. Unfortunately, because the gift tax laws have never been fully adjusted for inflation, gift tax laws no longer just impact the very wealthy; rather, they impact everyday people. What our gift tax laws say is that you can gift anyone you want $14,000 a year without any gift tax consequences. In addition, a spouse can join in on that gift and therefore, husband and wife can gift $28,000 to anyone they choose. In your particular situation, if you’re giving your sons $50,000, the first $14,000 qualifies for the annual gift tax exemption.
I should mention the annual gift tax exemption is per recipient of the gift. Therefore, someone can gift $14,000 to as many people as they choose without having to pay gift taxes. However, if the gift is over $14,000, there are still ways to gift the remaining portion tax free.
All of us have an estate tax exemption of over $5.4 million. What that means is upon our deaths, the first $5.4 million plus of assets goes to whomever we choose-estate tax free. However, this $5.4 million doesn’t have to be used just upon your death. You can choose to use some of it during your lifetime. Therefore, in your case, for the amount in excess of the annual gift tax exclusion, you can use some of your $5.4 million exemption to avoid gift taxes. Hence, there’s no problem making the gift for your sons by taking advantage of the $5.4 million estate tax exemption. There is one difference between using the annual $14,000 exclusion and your estate tax exclusion and that is you have to file a gift tax return (form 709). When you make a gift that is under $14,000, you don’t have any paperwork that you need to file with the IRS. However, if you use part of your $5.4 million exemption, then you have to file a return. That doesn’t mean you owe any taxes, but it does mean you have to file the return. The return is relatively simple and straight forward and even if you use the services of a professional, the cost should be minimal.
One of the hardest questions I get is from seniors who ask if they should start gifting money during their lifetime to their children or grandchildren. What makes this question difficult is that it is always important to make sure the donor has sufficient assets to protect themselves no matter what may occur in the future. In the case at hand, there is no doubt that there are sufficient assets and cash flow so it’s not an issue that she can afford to make the gift. However, in many situations it’s not so clear. My advice is you need to err in your favor. If there is a doubt, my advice, don’t make the gift. After all, what happens down the road if you find your resources are low and you need the money? It could put you in a difficult position. That is why I advise clients not to make substantial gifts to loved ones unless there is a cushion to protect them. I recognize that some may this is little selfish; however, it’s not. It is the responsible and adult thing to do. It may be difficult; however, you always have to make sure that you have the resources to protect yourself. Gifting is wonderful; however, if it puts you in a difficult financial position, either now or in the future, the pleasure you got from making the gift can come back to bite you and that is not something that makes sense for anyone.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org