ESTATE AND GIVING
November 17, 2020
Maximize your generosity in the current environment with these gifting strategies.
World events can strike different chords for different people, even within our own families.
If you find yourself wanting to help your loved one through economic uncertainty, you’re not alone. CNBC’s Millionaire Study, a recurring survey, found that 22% of millionaires had provided assistance to their adult children since the start of the COVID-19 pandemic and 21% had given help to other family members.
It goes the other way, too. Among millennials, the oldest of whom are approaching 40, 19% provided some level of support to a parent even before the pandemic, CNBC reported. In total, about 13% of Americans provide financial assistance to a parent.
Luckily, recent changes to tax laws surrounding gifts, in conjunction with historically low interest rates, make it easier now than almost ever to help your family members in the short term – and set them up for the long term – once the economic volatility settles. The following strategies may help you meet your goals.
1. Simply cash
Few solutions can quell an immediate financial hardship like the U.S. Mint’s finest. Since 2018, individuals have been permitted to give a person up to $15,000 annually without accruing a tax liability. These annual limits generally apply to single gifter-giftee pairs, so if you are married, your spouse could give an additional $15,000 and remain below the annual exclusion limit. Further, if you want to share your generosity with the recipient’s spouse, partner, child or other trusted relation, you could gift them $15,000 as well.
Giving over $15,000 per recipient won’t necessarily bring you new tax liabilities, at least not now. You will be expected to file the gift form with your tax return and it will count against your lifetime gift limit, currently $11,580,000 for an individual and double that for a married couple, which has implications when it comes to your estate. Tax laws change, of course, and this lifetime limit is set to expire by the end of 2025, so consult your financial advisor and tax professional to run through scenarios that might be more advantageous in the current climate.
2. A loan between friends (or family)
While you may want to loan your family member what they need and have them pay it back when it’s convenient for them, the IRS is a bit more rigid when it comes to transactions that could look like gifts, so it’s best to have the appropriate documentation in place.
Now may be an opportune time to issue a loan to a family member without feeling the point of the taxman’s sharpest pencil (and his rules regarding below-market loans). The reason? The minimum interest rate, known as the Applicable Federal Rate (AFR), is historically low. In July 2020, the short-term AFR hit 0.18%, which applies to loans with a term shorter than three years. For mid-term loans – which will be paid back between three and nine years – the rate was 0.45%, and for long-term loans with a repayment schedule longer than nine years the rate was 1.17%, lower than what you’d expect to see from a commercial lender.
Just make sure the loan is a bona fide creditor-debtor agreement with payment schedules, record-keeping, a promissory note and, optionally, a collateral agreement, Forbes magazine recommends. Consult with your attorney to draw up the documents and oversee the process.
3. Transferring with equities
If market volatility has taken a bite out of your investments but not your lifestyle, there’s another way to offer your family members a long-term opportunity, especially if they’ve had to dig into their retirement support.
During volatile market periods, there could be moments when your good stocks are facing the same kind of downward pressure as all the others. On the bright side, though they may have higher value later, they could serve as an undervalued gift. This means the annual gift exclusion limit of $15,000, and lifetime limit of $11,580,000, could go a lot further than it did at the hottest point in the market.
For example, say Bradley bought XYZ for $20/share a few years ago. In December, it was priced at $50/share but hovers around $35 now. If Bradley gifts his adult daughter Mary those potentially undervalued shares, he can remove the current value from his estate and Mary will get time to, hopefully, benefit from the stock’s future growth.*
Gift recipients rarely need to worry about paying gift taxes, but they may need to pay income taxes depending on the change in value of a gifted equity when they sell. Many times it makes sense to gift appreciated assets instead to avoid rules around dual basis. The IRS also has particular rules around gifting to those in negligible tax brackets (like minors or children in college), which could trigger the so-called kiddie tax. Because this area can get a little complicated, it’s best to consult a tax professional and your financial advisor first.
Family money matters
Even with a number of practical options, as the adage states: The mixing of money and family should be treated with care. But open communication, well-defined limits and expectations, and third-party advice can help slacken the natural tension of the situation. Here are some tips from professionals:
- Know what you can give. Though it might feel worth it to delay your own retirement to help your family member, for example, know that you may be giving up years when your health, wealth and time are at their peak.
- Be clear. Setting terms, goals and timelines up front clears up confusion and creates expectations. For some types of financial assistance, like an intra-family loan, these terms will be in writing – but have a plan if things don’t work out as expected. For less structured assistance, like cash, it will be up to both sides to prevent future resentment.
- Bring in a professional. When it comes to decisions like these, it’s always best to have a cool-headed, objective third party to help out. Consult your financial advisor, tax professional and/or attorney to get things started.
*This is a hypothetical example for illustration purpose only and does not represent an actual investment.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Sources: CNBC; IRS; Kiplinger; NerdWallet; NPR; U.S. Treasury; Forbes.com; RaymondJames.com