You’ve worked hard, you’ve done a good job on saving, you invested wisely, and you managed your spending well. You have a good financial plan working, and now you have money (or other assets) to share. Now you’re wondering who to share with and how!
A lot of people do not donate money during their life because life has uncertainties. For example, a catastrophic health event could be extremely costly. When you pass away, your will or trust documents will instruct who, where, and how your estate will be distributed.
If you are sure you have more than enough to cover all possible scenarios, you have options to consider. The current tax law allows you to gift $15,000 per person every year or $30,000 for a married couple. These gifts are non-taxable for you or for the recipients. If you stay inside the $15,000 limit, you will not have to file a gift tax return to report your gifts.
As the tax law stands today, you can give away up to $11.7 million based on the federal estate tax exemption without paying estate taxes. If you give any person more than $15,000 per year, you will use up some of this estate tax exemption. Just remember that this federal exemption amount will drop back to $5 million (plus inflation) in 2026 when the current tax law sunsets. However, Congress may pass new tax laws prior to 2026.
During your life, if you give away give away assets such as a personal home, investment property, and stocks and bonds, your cost basis in the asset transfers with the gift. Let’s say you bought a vacation home 50 years ago in an area that has appreciated rapidly. You would have to pay the tax on the gain if you sold the home. Once you gift the vacation home to your children, they will have to pay the tax on the gain when they sell the home.
The estate tax law currently allows a “step-up” in the cost basis of property or other assets to fair market value at your death. If you paid $50,000 for a vacation house that is now worth $1 million, your heirs could sell the property the day after they inherit it without any taxable gain on the sale.
Planning pays off. In any aspect of your life, and especially when it relates to your money. Plan first before you start gifting. Considering the emotional and relationship side benefits of gifting is just as important as the numbers. You and your spouse would want to see your children handle the gift wisely. You expected your Peter to pay down his credit card but ended up buying a new car. You hoped Sarah would spend some quality time with her family on vacations, instead they paid down their mortgage.
Keep in mind, you can also pay college or medical expenses directly for anyone in any amount and not use up your estate tax exemption. You can even take the entire family on an extended cruise or a trip to The Bahamas. In this way, you can spend quality time with your family. At the same time, you are able to control and appreciate how the money is being used.