Financial and estate planning usually focuses on those closest to us as we provide for spouses and children. Often, however, there are others for whom we would like to do something as well. We can provide for these other people who are special in our life either through gifts while we are alive or by providing for them at the time of our death. Of course, we can also do something for them now and more when we die.
These special people might be grandchildren, great-grandchildren, nieces and nephews, great-nieces and great-nephews, a godchild, or even a friend or friend’s child. The advantage of doing something now is being able to see your gift appreciated and enjoyed and to receive thanks directly from the recipient. You can help someone afford an education, make a down payment on a house, cover a medical expense, help them with a financial emergency or just brighten their life.
If you give the gift while you are alive, it is subject to the federal gift tax law. However, gifts to charity or your U.S. citizen spouse, and gifts to anyone else not exceeding $14,000 are exempt from the gift tax. You can give gifts to a person exceeding $14,000, but then you have to file a U.S. Gift Tax Return (Form 709). You probably will not have to pay any gift tax because you have a federal exemption ($5.49 million in 2017) that must be exceeded by the combination of your taxable gifts and your estate (when you die) before any tax has to be paid.
If the gift purpose is to help with education of younger people, be sure to consider pre-paid tuition plans and Section 529 plans. If the need is current, the gift checks for your special person should be payable directly to the school. Similarly, if you are helping someone with medical expenses, the checks should be payable directly to the medical provider. This makes the gifts exempt from gift tax.
The second time you can help these special people in your life is at the time of your death through provisions in your will, trust, or by naming them as a beneficiary of beneficiary designated property (life insurance, IRA’s, etc.). The reasons for these requests are likely to be the same as those when you consider making gifts. The difference is that you no longer have to worry about keeping enough assets to care for yourself.
The second time you can help these special people in your life is at the time of your death through provisions in your Will or Trust or by naming them as a beneficiary of beneficiary designated property (life insurance, IRA’s, etc.). The reasons for these requests are likely to be the same as those when you consider making gifts. The difference is that you no longer have to worry about keeping enough assets to care for yourself.
We are presently managing several trusts established in Wills for the educational benefit of grandchildren and another for a great niece. These trusts have made it possible for these beneficiaries to attend college. Other trusts that we have written in Wills provide for persons with disabilities, financial difficulties, undue influence from others, or money management issues. Carefully crafted trusts can help prevent the wasting of your bequest and assist those special people for an extended period.
Gifts to charity not only are exempt from the gift tax, they also provide a deduction for your income tax. If the gift to charity is a bequest made when you die, there is no income tax deduction but there is an estate tax deduction.
Gifts to charity, while you are alive or at the time of your death, can take many forms. The gift can be a simple gift of a specified number of dollars. It can also be a percentage of your estate when you die. There are also charitable trusts by which you can benefit both family members (even yourself) and charities. There are also charitable gift annuities by which you can benefit the charity and guarantee yourself a steady stream of income for the rest of your life.
It is important to engage your financial planner and/or your estate planning attorney before you start making substantial gifts. They can help you understand the gift, income, estate and inheritance tax issues and assist you in designing a plan that accomplishes your goals while making sure that you always have sufficient assets to take care of you.
For more information on wills and estate planning, don’t hesitate to contact us for assistance.