Gifting assets to your heirs throughout your lifetime can save significantly on taxes. Even for those not subject to estate taxes.
For those subject to estate taxes
The Federal government taxes inheritances up to 40% on assets above the estate tax exemption. After 2025, the estate tax exemption will revert back to the $5.49 million exemption (adjusted for inflation), unless Congress makes the rates included in the Tax Cuts and Jobs Act of 2017 permanent. Many states also impose their own estate and inheritance taxes with various levels of exemption. Some states have exemptions as low as $1 million (see our Inheritance Resources to learn more about your state).
If your estate will be subject to estate or inheritance taxes (or you expect it may become subject to taxes in the future), consider a lifelong gifting strategy to pass your assets to your heirs tax-efficiently.
Each year, the federal government allows you to gift a certain amount of money to each person without it becoming subject to gift taxes. In 2022, you are allowed to gift $16,000 per person ($32,000 for two parents). In 2023, you will be allowed to gift $17,000 per person ($34,000 for two parents).
Direct gifts for tuition and medical expenses do not count toward this exclusion. You can make unlimited gifts if those gifts are directly paid to a qualified medical or educational institution (tuition, books, and fees are allowed, but not room and board).
During this holiday season, as a couple, you may want to consider giving up to $32,000 directly to your children or grandchildren or to properly established trusts for their benefit. This allows this money to be invested and grow in their name to avoid unnecessary taxes.
For those not subject to estate taxes
Even if your estate is not large enough to be subject to estate taxes, you may want to consider a gifting strategy to improve the tax-efficiency of your loved one's assets.
Your children and grandchildren, whether they are in high school, college, or entering the workforce, may be eligible to start contributing to a Roth IRA. If they have some earned income from a summer job, a college internship, or a full-time job after college, they can contribute up to the amount they earned for the year to a Roth IRA (a maximum of $6,000 for 2022 and $6,500 for 2023).
Many of them may have never heard of a Roth IRA before, or for those that have, may not have the resources or the inclination to start saving for the future. If you have more money saved than you need, you may want to consider helping them open a Roth IRA and gifting them money to invest in that retirement account. All the growth in Roth IRAs is completely tax and penalty-free if it is withdrawn appropriately.
We know that compound interest is extremely powerful and that the earlier a person starts investing, the greater the returns they can have. Many people start saving for retirement extremely late simply because they never passed the initial hurdle of opening an account. Already having an investing account opened can help your children or grandchildren start investing on their own when they have the resources to do so. Plus, seeing their investments grow early on can instill the value and importance of diligent saving and investing.
Consider speaking with a financial advisor who can help you determine what gifting strategy is right for you. If you are interested in a free consultation, schedule a meeting with one of our financial professionals by clicking here.
DISCLOSURE: Silverstone Financial LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Please see our disclosures page for additional information.