Current Issue » Vol. 26

Should You Give Away While You are Still Living, Or Wait and Pass it Along at Your Death?

By Tom McDavitt

309749Many of our clients inquire about gifting assets to their children during their lifetimes as opposed to waiting to transfer after their deaths. There are reasons that make this attractive and reasons to refrain from doing it.

Some of the most common benefits are:

1) You actually get to see how your generosity benefits the recipient. This is the most common reason to give away money. For example, it can be rewarding to see the donee relieved of some stress during expensive periods in their lives.

2) You decide how much and to whom. You may decide to gift money to specific children who have particular needs while delaying gifts to those you believe won’t benefit as much.

3) It avoids probate and is not subject to public scrutiny. Remember that a will is a public document and can be viewed by anyone that wants to look at it.
4) You may provide some level of financial independence to your children. This might relieve some financial stress or provide them with some capital to fund an investment opportunity of which they might not otherwise take advantage.

5) It may help reduce your wealth to levels that allow you to qualify for Medicaid if a long-term care need arises more than 5 years after the gift. “Look back” rules may disqualify a gift made to avoid paying for the cost of a nursing home in the near future.

Some reasons that it can be disadvantageous are:

1) You could live longer than you expected and need the money. Everyone worries about outliving their savings.

2) You might cause friction in a family if there are not equal distributions. If word gets out that you gave money to one child while neglecting others, it may cause bad blood amongst the siblings.

3) You can’t tell them how to use it once they have it. If they spend it in a way that you would not normally consider prudent, there is no recourse.

4) In the event of divorce, some portion of the gift may be owned by the estranged spouse. Once the asset becomes a marital asset, it is all fair game in a divorce.

5) If the person you give the gift to is sued, the asset is likely to be subject to claims.

Are there tax advantages of the gift?

Yes, there are some benefits, such as the future earnings on the gifted assets being transferred out of your estate. If you were to gift shares of stock or interest in real estate then the future potentially substantial gains would be shifted to the recipient’s tax bracket ~ which might be lower than yours as well.

How much can I give?

You are allowed to transfer $13,000 per person (or twice that amount if there are two spouses making the gifts) each year without incurring gift taxes. Anything above that will reduce the amount that you can leave at death without estate taxes. The gift is usually an outright gift of cash, but as mentioned above it may also be shares of stocks, mutual funds or real estate as well as many other types of assets.

How do I proceed?

It would be wise to involve your tax, legal and financial advisers before embarking on any such strategies to be certain that you understand the implications of a gift.

Tom McDavitt, located at 102 Shore Dr. Suite 400 Worcester, MA 01605, is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser, and can be reached at (508) 852-6222

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