Free Money
“Should I give money to my kids or grandkids?” Our team at WWM fields this question almost every week.
Before you give away that $, always remember these 2 important rules:
Never give a gift which….
- You cannot afford
- Will do more harm than good
NOW OR LATER?
So should you gift money to your kids when most people do, which is after you die?
Or should you gift the money sooner?
For decades, the financial planners in us came down squarely in the “after you die” camp. Ultimately, that gives the money the max amount of time to grow and compound. Just the kind of nerdy delayed-gratification setup which soothes our financial calculator brains.
But as we have matured, and witnessed our clients’ families go through all the cycles of life, our thinking has become more balanced. Sure, a larger sum later with more zeroes in it sounds great. And sometimes that is exactly what is best. However, often we have seen clients in their late 80’s or 90’s pass away, and their “kids” who are ages 65 – 70 inherit this pile of $. Frequently, this $ arrives too late to actually be fully appreciated.
As we age, some of the things we used to enjoy when we were younger become out of reach. Maybe it’s skiing, attending large concerts in a city, hiking through the national parks, traveling to far away countries, horseback riding, etc. Or perhaps we could have actually used some of that money many years ago when we were desperately trying to scrape together a down payment on our first starter home.
Also, if you gift some of the $ now, you get the satisfaction of seeing your loved ones enjoy it. In addition, your gift may even help reduce your income taxes now, and your estate taxes later.
We just finished reading a book written by Bill Perkins titled Die With Zero. Having a hard time understanding why gifting some $ now might make more sense than later? Read the book. Warning: you might suddenly find yourself scheduling a few extra vacations way before you reach the last page. 😉
Are you thinking about gifting to your grandkids for college expenses? To avoid the possibility of your kindness hurting your grandchild’s ability to receive financial aid, instead of writing a check directly to your grandchild consider…
- Sending the money to the parents to hold until after financial aid has been determined
- Writing a check payable directly to the college to help pay the tuition invoice
- Or gifting the money to your grandchild after graduation to help them pay off student loans
WHAT ABOUT GIFT TAXES?
The first thing you might worry about is “am I going to have to pay federal taxes if I gift money?” Probably not. The IRS Annual Gift Tax Exclusion amount for 2023 is $17,000/person. So each one of us can gift up to $17,000 (married couples may gift up to $34,000) to another person before we have to include a gift tax return (Form 709) with our normal annual tax filing.
Does exceeding the $17k limit, and therefore needing to include a form 709, definitely mean we (or the person we gave the $ to) will owe taxes? No. In fact, the vast majority of people will not owe a penny in federal taxes if they gift more than $17,000 in a year. Why? It gets a little complicated, but basically the IRS gives each one of us a lifetime gift tax exemption, and in 2023 the ceiling is all the way up at $12,920,000.
While this Marketmail focused on gifting to people, we will publish another soon which talks about gifting to charity.
Questions? As always, we are here to help you.
Authors: Rick Wagner & Keith Wagner
Source: The Internal Revenue Service.
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