Perhaps your son asks for help with a down payment on the dream house for his growing family. Maybe your daughter is seeking startup funding for a promising new business. Or maybe you’ve been thinking it would feel gratifying to pass some wealth to your family sooner rather than later, so you can see the funds in use.
No matter what’s driving the decision, consider the financial and emotional implications before gifting significant assets to heirs.
"The first and most important consideration is to examine any monetary gift in the context of your entire estate," says M. Wong, senior vice president and regional trust manager at U.S. Bank Wealth Management. It’s easy to get swept into an adult child’s pressing need or to be overcome with emotion when you’re thinking of passing on your legacy. However, you need to consider your own future first, and make sure you’re protecting your retirement years.
Whatever amount you’re considering giving or what its intended use, before making any decisions, Wong stresses, develop a gifting plan: how much, when and why. “It helps to lay out the whole picture to understand how much you can gift while keeping what you will need,” Wong says.
When it comes to your family’s immediate needs, gifts of cash/assets can offer the benefit of potentially reducing your estate tax burden — one of the main motivators for many who are considering gifting to heirs.
For smaller gifts, the IRS rules allow any individual to gift up to $15,000 per year to any recipient without having to consider the potential impact of a taxable gift. A married couple may give up to $30,000 to any individual.
Larger gifts may also sidestep tax liabilities if you’re willing to have them count against the lifetime estate and gift tax exemption, which is currently $11.58 million for individuals and $23.16 million for married couples (2021 limits are $11.7 million for individuals and $23.4 million for married couples).
The ease of such a gift is beneficial for the recipient, but on the flip side, you’ve given up control of it. “When you gift outright to your children, they may do with it whatever they wish,” Wong says. Watching adult children spend money in ways you wouldn’t can quickly sour the joy and satisfaction of giving.
For a little more control over the distribution, many people consider a trust. In its simplest form, a trust is an entity, created and funded with cash, assets and investments, which allows you to dictate how your estate is distributed to beneficiaries.
An irrevocable trust, in particular, may also be useful if the value of your estate exceeds the lifetime exemption. Although they typically can’t be changed or amended after they’re created, the assets move out of your estate and taxes are paid out of the trust, which can give you greater protection from estate taxes if created properly.
Irrevocable trusts come in various forms, depending on the gifting goals. “There are many ways of setting these up, and it’s not simply one approach or another — they can work together,” Wong says. “But you still need to make sure that the whole estate plan is taken care of in every direction.”
Although trusts may be adapted to handle many situations, they have limitations. As complex, legally binding arrangements, it makes sense to be aware of their benefits and drawbacks.
Benefits of gifting through a trust may include:
On the other hand, drawbacks of gifting through a trust may include:
When it comes to helping your heirs and preserving your legacy, a little planning can ease the way, helping to ensure you’re giving the way you intended.
Read more on trust and estate planning to learn how to support the people and causes you care about, now and in the future.