The WSJ had an article this week titled You Can Give Your Child More Tax-Free Money Than You Think by Peter Coy. Given that Mom and Dad and Grandma and Grandpa have won at the Game of Life, and so many are doing their level best in uncertain times, these concepts and strategies that go beyond the $19K Gift Tax are hiding in plain sight.
The wealth divide is largely a generational one, for now. According to the Federal Reserve data, “From 1989 to 2022, households headed by people age 65 to 74 added $231,000 to their median net worth, while households headed by people under 35 added just $20,000.” And this capacity to give means that “many would rather give the money now, when it can help with a house, child care or other major expenses, than leave it behind after they die.”
The expression I learned was this is called Giving with Warm Hands, a nice twist on an old adage. So, let’s get into some details:
- $19K Gift Tax - This is the commonly known mechanism, does not require a tax filing, can be done for spouses and grandchildren individually, and can be done annually
- Lifetime Exemption - This is the sum of all gifts above the $19K threshold, individually accrued, is currently capped at $15M (or $30M for a couple), and requires IRS Form 709
- Two Additional Gifting Exclusions - “Tuition payments made directly to a qualifying school, and qualifying medical expenses paid directly to the provider, are entirely excluded from gift tax, with no dollar cap. They don’t count against either the $19,000 annual exclusion or your lifetime exemption.”
- 529 Contributions - Everyone loves education and these compounding accounts, but did you know the “IRS lets you contribute five years’ worth of annual exclusions at once—namely, up to $95,000 per beneficiary”
- “Step Up” in Basis - Having an appreciated asset pass via the estate, rather than as a gift, allows the recipient to enjoy the “step up” in cost basis at the time of settlement, potentially avoiding a larger tax liability
- Trump Accounts - These “went live on July 4 and are still being sorted out by the IRS. The short version: Money grows in them tax-deferred. Parents can contribute up to $5,000 of after-tax money per year per child under 18, and employers can kick in up to $2,500. Grandparents can contribute too, but the $5,000 annual cap is shared across all contributors combined.”
Am I advocating for Mom and Dad and Grandma and Grandpa to give away all of their money? Of course not. As we have repeatedly said, it’s their money! They deserve to ride off into the sunset as they choose. “The tax code doesn’t ask whether you can afford to give—that is a separate question you have to answer for yourself, and it should come before any tax optimization.”
Here’s the thing: Mom and Dad are living longer. Can they afford to? Are we going to have to pay for that? College is expensive. How are we going to pay for that? We are going to live much longer. Are we ready to pay for that? Families, friends, and communities have always helped each other. It’s what we do. And the IRS Tax Code allows us to give when able. This is one of the many ways we can help each other and move our families forward…