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Gift Now or Inherit Later?

By Judy Loy
Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.

Many people have saved all their lives to enjoy their retirement. Many retirees and workers also plan to leave an inheritance. For some, the big question is whether to gift to charities or family in their lifetimes. The other question is whether it is best to gift a security out of your estate. A stock or mutual fund that has a large price increase and thus a large taxable gain if sold will get a stepped-up cost basis in the estate. This will alleviate the gain for the heirs.

The first question to ask is: Are you comfortable and able to cover your long-term expenses, including any long-term care? If after consulting with your advisor, the answer is “yes” then you can consider gifting during your lifetime. The next question is: How and to who? The main reason to gift during your lifetime is to avoid estate taxes and help your relatives when they may most need it. Also, you get to see them enjoy or help get them through a rough time, which can be priceless.

Gifting directly to children or grandchildren (or anyone) can be as simple as giving money directly annually. The IRS allows a person to give away $15,000 to another person without tax consequences every calendar year. Therefore, if a grandfather and grandmother wish to gift to their daughter, her spouse and their two children, they could give a total of $120,000 in one year. The grandfather can give $15,000 to his daughter and her spouse then give $15,000 to each grandchild. The grandmother can do the same. This effectively removes it from the estate.

For larger amounts, removal from an estate and gifting can be done through an irrevocable trust. It is important for this to be done with the advisor, accountant and attorney involved. Once money is put inside an irrevocable trust, the money is removed from your estate and is out of your control. You can receive income from the trust but everything that can be done with the trust assets is controlled by the trust document and the trustee, who must work as a fiduciary.

One way to benefit qualified charities that helps the retiree tremendously tax-wise is a qualified charitable distribution (QCD). This is only available to those age 72 and older who are required to take money from their retirement plans. These are the IRAs and 401k accounts that have never been taxed and each year you must pull an amount called the required minimum distribution (RMD) based on your age and the last year’s ending balance. The penalty for not doing so is steep (50% tax penalty). If you don’t need the money that you must take from your retirement accounts, you can send it directly to a charity. Thus, a RMD becomes a QCD.  When the required amount is sent directly from your retirement account to the 501c3 charity, the amount gifted is not taxable.

First and foremost, before making decisions on gifting, trusts or charitable contributions, discuss the viability and options with your trusted team:  attorney, accountant and financial advisor. With those key people working together, you will get the best advice on moving forward.    

All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.