You’ve done well in retirement planning and you’re living a good life.  You may have plans to leave money to your heirs, and many of our clients want to learn about providing gift donations, too.

Why? Gift donations may be used more immediately, so clients get to see how their gift donation plays out while they’re still alive.

If your gift is used to buy your grandchild their first car or for a downpayment on a house, you might want to join in on the celebration. You may want to loan money to your child at a nominal interest rate or even co-sign on a house for them.

We’re going to tackle a lot of these things that you might be thinking of after you secure your retirement and want to help others in your life.

What is the Purpose of the Gift?

There are a million reasons to consider a gift donation. Sometimes, you want to help a child who needs some financial assistance. You might want to give them money every month, or you give them money outright.

Do you want your child to pay this money back?

Keep in mind that you need to maintain your own financial stability, too. Your financial plan may look great, and you run the numbers and you find that you have funds to consider a gift donation.  In one scenario, let’s say the need for a gift donation is not urgent and you decide not to make a gift donation. Keeping those funds would give you and your financial plan an opportunity to have higher earning potential and possibly greater financial stability down the road.

Another scenario to consider is you give your children money right now and without the prerequisite that they’ll be able to give it back if you need it. If you’ve reviewed your financial plan and gifting money with this prerequisite is not something you are comfortable with, it may be best to wait. Most folks want to avoid a situation where a gift donation now puts them in a hard financial position that would affect their children in the future.

Carefully reviewing your financial plan before making a gift donation will help secure your retirement.

Potential Tax Implications of Your Gift

Gift donations may have a tax implication, which is something you really want to consider, too. Consider asking:

• Will there be taxes due from this gift donation?
• Will the money exceed the annual gifting amount?

In 2024, you can make a $18,000 gift donation without any tax implications per donee. For example, if you have three kids, you can gift $18,000 to each child. If you exceed this amount, you need to fill out an extra document and attach it to your tax return to document how much you are gifting over your lifetime.

If you leave behind more than the current estate tax limit of $13 million, documentation will be more important.

For most people, you can gift $18,000 without issue. You:

• Will NOT owe estate tax on the gifted amount
• Will NOT owe federal tax on cash gift donations
• May be subject to federal and state tax if you sell stock to gift the proceeds of that sale
• Will owe federal and state tax if you withdraw from your IRA to gift money

Be strategic and be aware of the gift’s source of funds, because you might be hit with a Medicare surcharge (IRMAA) or move into unfavorable tax brackets. Another good reason to review your financial plan before gifting money.

When it comes to the donee, there are no tax implications for receiving a gift donation.

Family Dynamics and Your Legacy

For a family example, we’ll discuss a family with 2 children. Child 1 needs some financial help now. Child 2 doesn’t currently need financial help, so they will not receive a gift donation now. If Child 2 finds out that you’ve been giving Child 1 $18,000 a year, Child 2 may not feel like this is fair at the time of inheritance.

One option to address this is to document the gifts that you’ve been giving and reduce it from the Child 1’s inheritance to balance things out a bit.

Let’s look at some example numbers for this family:

• $1 million estate (pre-gifting)
• $200,000 gifted to Child 1
• $800,000 estate (post-gifting)

In this case, for a “fair” inheritance, Child 1 would receive $300,000 and Child 2 would receive $500,000. Reviewing your financial plan and your estate plan documents on a regular basis is important to keep these numbers up to date.

How Can You Help a Child Buy a Home?

Co-signing is something that we don’t recommend. If you co-sign for your child to get the home, you’re still financially tied to the home. If the child defaults on the home, you may have to step in and buy it or deal with the credit ramifications of it all.

If you have reviewed your financial plan and don’t mind paying for the home if your child defaults, this is obviously something that you can opt to do.

Co-signing comes with a lot of risks and is the least desirable option.

Some other options for helping a child to buy a home are loaning or gifting the child money. We had a client who wanted to loan their child $10,000 for a downpayment, and this was the easiest option. If your gift remains under the current $18,000 gift limit, you can write a check to the child and your spouse can do the same.

But if the gift is higher than the exclusion, then you need to do some planning.

If you loan $100,000 (not a gift), you will need to:

• Structure the loan properly
• Keep legal documents on the loan
• Require monthly payments

Loans are a way to avoid potential tax implications tied to gifting. However, you do need to meet a minimum interest rate, which your tax professional can help you determine.

If you charge 0% interest, the government will view it as a gift, and require additional documentation to file with your tax return.

You can charge an interest-only payment, or you can amortize it. In your loan agreement or estate planning documents, you can have a stipulation that upon your death, the loan is forgiven. Loaning money offers you:

• Potential source of income from interest
• Easier loan option for your child over banks or credit unions

You might be able to give your child a loan without closing costs and at a favorable interest rate compared to today’s market. But, as with a mortgage or other loan, you do want to keep an interest in the home if your child doesn’t repay the money to maintain the legitimacy of the loan agreement.

Step-up in basis is something to consider, too. Let’s say that you have your own house and a beach house. If you gift your beach house while alive, you need to think about the potential capital gains tax on the property for the donee.

If you would like to chat with us about gift donations further, feel free to reach out to us.

Click here to schedule a free consultation with us to discuss gifting in your unique situation.