Generosity can be a beautiful thing. There is nothing quite like working hard for a living and sharing what you have earned with your loved ones. Unfortunately, though, there are some limitations on that sense of generosity when it comes to taxes and other factors to take into consideration when it comes to estate planning. Noble motives do not matter in the eyes of the government; each American must follow the same set of rules that would apply to any other lifetime transfers – no matter who you are giving to.
Before you take out your checkbook to gift your friends or family money, check out these dos and don’ts:
One of the best ways to gift money to loved ones is to set them up with a Section 529 education savings plan. They help relieve the burden of tuition, books, room, and board. 529 account contributions are considered gifts, but the money grows tax-free and can be withdrawn tax-free, so long as it is used for college tuition or related expenses.
The annual gift exclusion allows individuals to write checks or gift cash values up to $15,000 to as many people as you would like per year. Spouses can combine their exclusions for up to $30,000, tax-free. Go over that amount, though, and you will be expected to shell out between 18 and 40 percent on gift taxes. There is a lifetime limit to this rule, too. Everyone can gift up to $11 million tax-free, and each couple can gift up to $22 million. Although this amount can change if any future legislation is passed, you can start planning today with an experienced estate planning attorney to help carefully execute a tax plan. With proper planning, it is easy to come in well under the exclusion limits.
If you are eager to support a loved one in their quest to get healthy or educated, paying their bills is a great option. Without using your annual exclusion, you can pay for tuition, medical, and dental expenses for anyone you want. You must make payments directly to the service providers, though – do not just reimburse your friend or family member.
Houses are expensive. It is no wonder that so many financial gifts aim to help first-time homebuyers put money down on their dream property. If your loved one is using the money you have gifted them to buy a home, do not forget to write a gift letter. It helps clarify that your money is indeed a gift, and you have no expectations for it being paid back. Be sure to include your contact information, your relationship with the buyer, the dollar amount of the gift that has been given, and a statement that no repayment is expected.
Want to let someone live in your house rent-free? Or perhaps you see yourself buying a home and letting a loved one stay there for free. So long as the fair market value of the rent does not exceed the annual exclusion amounts, you are free to do just that.
Ensuring you are doing the proper thing when gifting to your friends or family members will pay off in the grand scheme of planning ahead. Your loved ones should not have to be burdened by the IRS upon your death or have any unexpected tax bills hit their mailboxes. By speaking with a member of Hegwood Law Group’s experienced estate planning team, you can rest assured that your assets will be transferred while also mitigating the tax expenses that your estate may be liable for in the future. To begin planning today, click here to schedule your strategy session online, or call our office at (281) 885-8826.
Hegwood Law Group