The days of inheriting utility stocks from your Depression-era parents via a will are gone. Most of the affluent Baby Boomers we work with would rather give during life. They’d rather help their kids with a down payment in an impossible market. They’d rather help fund their grandkids’ education. Simply, they like seeing a positive impact.
The problem? It’s often less tax-efficient to give during life. Perhaps I can help you solve that problem with the following strategies:
1. Take advantage of tax arbitrage.
The main reason it is often more efficient to give at death is because capital assets “step up.” That means if I buy a stock for $10 and it goes to $90, my kids can inherit that stock at $90, sell it for $90 and pay no taxes. That is not the case for assets given during life.
If you give someone a stock during your life, that $10 basis will be carried over. So, if the recipient sells it for $90, there is an $80 capital gain. Here’s the catch: If your kids have taxable income under $47,025 (single), or $94,050 (married), their capital gains tax rate is 0%.
If they’re early in their career or are students, or their income falls below those thresholds for any reason, they can turn around and sell that stock without gain. Be careful here that the sale doesn’t push them into a taxable position.
Also note that I am specifically addressing the capital gains tax here. Estate taxes are another issue, which I will handle below.
2. Give cash (check, bank transfer, etc.) above or below the annual gift limit.
The gift tax exclusion is essentially the amount you can give without it counting against your lifetime gift allowance. And you don’t have to report it. That amount in 2024 is $18,000. It gets even sweeter. I’m married and have two daughters. I can give each of them $18,000 each year. My wife and I can also do “split gifts,” meaning we can each give $18,000 without it counting against our lifetime exclusion. So, we can give $36,000 to each girl for a total of $72,000 each year. That’s a lot of cheddar! It’s important to note that if you do make a split gift, you must file IRS Form 709, a gift tax return.
If you’re feeling charitable toward your kids, you can also go over the gift limits. If you do this, you do need to report the gift, as above, on 709. No tax will be paid, but any amount over the annual limit will count against your lifetime exclusion. This used to be of consequence for almost all of our clients. The lifetime federal exclusion in 2024 is $13.61 million (per person) so it impacts a small fraction of the folks that it used to.
3. Make direct payments.
Your oldest grandkid is heading off to college. Hard to believe! You have decided to help and give your daughter a check for the first semester’s tuition at Boston University. Big mistake! You have just crossed the annual gift threshold unnecessarily. You are allowed to give money directly to educational institutions or for medical expenses without it counting against your annual gift limit or lifetime exclusion. Those two categories account for some pretty major expenditures, so make sure the kid says thank you ;)!
The most important part of giving money to your kids is not the tax ramifications, though they should not be overlooked. Most important, you need to figure out the impact. I often say that a gift to a child can either be quicksand or a rope. If you’ve determined that it will actually help your kids in the long run, you need to ensure you can afford it. Just as the flight attendant instructs you on the airplane, put your oxygen mask on before you help someone else.
Your financial plan will tell you whether you can afford it. You would add the gift as a goal in addition to your monthly expenses. If you don’t have a financial plan, you can use the free version of the software we use.
See my article Four Ways to Give Money Tax-Free to Your Kids When You Die for alternatives to these suggestions.
