Women and Wealth: Parts I and II focused on getting your “financial house” in order. These posts offered our suggestions for improving financial literacy for women – with insight into cash flow and the importance of diversifying asset groups in your portfolio. In this post, we turn to other financial goals: taking care of your family through effective and tax-efficient gifting.
Let’s consider Rosemary, a 65 year old widow with 2 children and 3 grandchildren. Her cash flow is under control: she has invested her portfolio defensively and is financially comfortable in her retirement. With her additional assets, Rosemary now wants to figure out how to take care of her family.
There are a number of ways Rosemary can ‘gift’ to her family. Some of the considerations are how much to gift, whether to give while she is still alive or as a legacy after her death, as well as whether she wants to control how the money is spent. The three gifting methods are: Annual gifting, Irrevocable Trusts and Revocable Trusts. Let’s look at each of these in turn.
Annual gifting is a tax-free method of gifting which reduces your taxable estate without having to file a gift tax return. The 2018 annual gifting limit is $15,000 per person. For example: Rosemary could give up to $15,000 to each grandchild for a total of $45,000 annually.
Annual Gifting and 529 Plans
If Rosemary has sufficient assets, and knows that at least one of her grandchildren plans on going on to college, she could front-load a college savings plan by making a five-year election and gifting $75,000 (5 x $15,000) to a 529 Plan in the first year. The benefit of this gift is that it grows tax free from the very first year. The downside, merely an administrative one, is that Rosemary will have to file a gift tax return to make this election; however, there is no reduction to her life-time gift tax exemption – which is currently $11.2 million per person. Given sufficient assets, this can be a highly effective strategy.
Another option would be for Rosemary to set up an irrevocable trust, naming her grandchildren as the beneficiaries, funding it with appreciated securities and letting the assets grow separately from her own accounts. In this case, Rosemary isn’t sure if all of her grandchildren will follow traditional academic paths, she still wants to set money aside for each of them and get the money out of her estate. The irrevocable trust could have a specific goal – such as her grandchildren’s education, health and support, where education could be broadly defined to include traditional and non-traditional education. Such a trust assures that the money is used as Rosemary wishes; it is not part of Rosemary’s estate and will be protected from creditors. Rosemary’s responsibilities include filing a gift tax return for the amount of assets transferred to the trust as well as ensuring that the trust files annual tax returns.
Rosemary and her deceased husband were able to save enough money such that it is more than likely that Rosemary will not spend all of the assets she has in her lifetime. So, in addition to being able to gift assets to her grandchildren while she is still alive, Rosemary can also provide additional financial security for her children and grandchildren at her death.
As part of Rosemary’s estate planning, she can set up a revocable trust, naming her children as the successor beneficiaries of her trust, and transfer the majority of her assets to the trust. The trust income and principal distributions can be paid out to Rosemary annually. At Rosemary’s death, her trust becomes an irrevocable trust for her children, paid out under whatever terms she has stated.
Unlike a will, the trust avoids probate. It also does not have to transfer all of the estate assets immediately, but rather can be ‘staged’ across time or triggered to support different objectives. With careful drafting by an estate planning attorney, Rosemary’s revocable trust can control where her assets go at death, providing protection for her children's inheritance from creditors and in the unforeseen event one of her children gets divorced or remarried. This ensures that the assets would stay within her family.
As a parent or grandparent, having the financial means to be able to make annual gifts or establish trusts, for the benefit of children and/or grandchildren is one of the most rewarding aspects of careful financial planning.
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