Tax-Free Gifting Strategies

SHIRLEY MUELLER, MD

By employing various gifting strategies, a couple can transfer hundreds of thousands of dollars tax free out of their estate to the benefit of their loved ones. It is unlikely that most readers have the resources to do all of it, but making just some moves is worthwhile.

A friend of mine was talking about her husband’s parents. They are both in their 90s, likely have a short remaining life expectancy, and still aren’t transferring money out their large estate for their children or grandchildren to enjoy now because they are fearful they won’t have enough money to live.

If this weren’t the case, they (like us) have a chance to transfer money to children and grandchildren plus anyone else we deem suitable during our lifetime.

Presently, individuals can gift $14,000 per year per person without paying any tax or filling out any paperwork. The total together is $28,000 per couple for each person though most accountants advise restricting the gift below the limit because Christmas gifts, etc. count in the total. Therefore, a sum of $26,000 per couple is more realistic.

Grandparents, as well as parents, can pay for education and medical bills. If funded directly to the institution to which the money is owed, then there is no tax filing needed.

Another more complicated way to pay for schooling, but in the future, is a 529 plan, which now seems a household word, and the Coverdell Education Savings Account — both of which should be discussed with a financial advisor.

Another way is to transfer money to a Roth IRA set up for an heir or heirs. I mention it because it is a favorite of mine. Though the giver does have to pay tax upon setting up the account, once initiated, the funds grow tax free and can be taken out tax free. Additionally, if the originator of the Roth needs the money during her or his life, she or he can tap it. The rule of thumb is that the originator should expect to live 10 years beyond setting up the Roth so that the expense of the taxes paid can hopefully be recouped in that time period. Again, discuss with your financial advisor.

By taking a hypothetical family of six — two parents and four children — the benefit of this kind of planning (provided there are monies available for it) is obvious. Mom and Dad give each child and his or her spouse $24,000 per year. That is $96,000 out of their estate in a twelve-month period. If there are grandchildren, they receive the same. For a school-age child, tuition is paid to the institution. In the case of a private school, this could run up to $56,000 per year or more depending on the circumstances. 529’s, or the equivalents, are set up as well for future education. Roth’s are established. We are talking potentially $200,000 or more out of an estate each year.

Yes, this is good tax planning. It is unlikely, though, that most readers have the resources to do all of it. But, maybe we can do some of it and feel better about ourselves and help our children, grandchildren and others at the same time.