Many families commonly aim to leave a meaningful inheritance for loved ones. But have you considered giving away more of your money and assets during your lifetime?
The trend of giving while living is taking over, and there are plenty of strong reasons why.
From seeing your legacy in action to managing tax liabilities, here’s how giving now can be an excellent gift for everyone involved.
The Basics of Gifting
Some retirees are wary of gifting to loved ones because of the tax implications. But thanks to the Tax Cuts and Jobs Acts of 2017, the estate tax exemption is at an all-time high. With these changes, you can give away a lot of money before the federal government intervenes.
For 2022, the federal estate tax exemption is $12.06 million for individuals and $24.12 million for married couples.1 Unless further legislative changes are made, this larger exemption is set to sunset in 2026, where it will likely lower to $6 million.
This estate exemption is cumulative over your lifetime, and you can give to as many recipients as you’d like.
How Does the Gift Tax Work?
The IRS also imposes a gift tax, with a 2022 exemption limit of $16,000 for individuals or $32,000 for married couples. If your gifting exceeds this amount in a calendar year, you must report it. The amount you report goes toward your $12.06 million estate exemption limit.
Whoever is receiving your gift isn’t required to report it on their taxes, and adding to your exemption “tab” will likely mean that you are not required to pay taxes on it either–as long as you are under the $12.06 million threshold.
What About State Taxes?
Remember, this $12.06 million exemption is for federal estate taxes only. If you live in a state with its own estate tax, you still may be liable for taxes on gifting.
As of 2022, the states that impose an estate tax include:2
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- Washington, D.C.
Luckily, Michigan isn’t on this list!
3 Reasons to Consider Giving Before Your Passing
Without the weight of taxes on your shoulders, you are in a position to give more freely to your loved ones. Here are three reasons why giving while you’re still living can enhance your legacy.
Reason #1: See The Impact Of Your Gift
Most think of estate planning as preparing a legacy after their passing. And while you can still give when you’re gone, you lose out on the joy of seeing your loved ones put your gifts to good use.
Rather than having a lump sum sitting in a bank, you may find it more gratifying to watch your savings in action. Imagine a grandchild walking across the stage at graduation, grinning ear-to-ear knowing they’re debt-free because of you. Or the look on your niece’s face when she realizes she can afford a downpayment on her first house.
There are so many ways your money can make an impact today. And don’t forget, the same goes for your charitable giving. If you’re passionate about a cause, there’s no reason to wait to donate, especially if they could use the immediate financial support.
Reason #2: Help Loved Ones Save on Taxes
Always remember the three core estate planning elements: honor your intent, maximize efficiency, and minimize taxes.
Giving away money now reduces the value of your estate, which may limit estate or inheritance tax liabilities later down the line. With such high exemption rates in 2022, this may not be of concern. But in less than five years, that rate will slice in half (unless further legislation is passed).
Give to Charity
When making a charitable donation, neither you nor the non-profit pay taxes on the gift. If you choose to donate something like an appreciated security, this can be especially tax savvy. It reduces your tax liability and gives an organization you care about an even larger gift.
Give to Family
For the most part, your loved ones won’t pay taxes on the cash or gifts you give them. However, some assets, such as an IRA, will require the beneficiary to pay taxes on distributions. If you’re looking to gift different accounts to loved ones, we recommend working with a financial professional to review potential tax obligations.
Reason #3: Feel Fulfilled
When you give your time and resources meaningfully, you tend to feel more fulfilled. Doing good by others is a great way to bring enjoyment to your retirement, especially when it’s helping loved ones achieve their own milestones or goals.
Giving money to family, friends, and charities while you’re still alive makes the most of your money and creates a legacy you can be proud of.
Give Generously
As you move through the estate planning process, consider gifting while still being around to enjoy it. Our team at Legacy Wealth works closely with those in or nearing retirement to prepare meaningful estate plans.
If this is something you’re in the process of doing or have questions about getting started, feel free to reach out to us anytime.
Sources:
217 States With Estate or Inheritance Taxes
Disclaimer:
Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.
All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.
