Financially helping family members can be rewarding. However, it pays to proceed thoughtfully.
Perhaps your son asks for help with a down payment on the dream house for his growing family. Maybe your daughter is seeking startup funding for a promising new business. Or maybe you’ve been thinking it would feel gratifying to pass some wealth to your family sooner rather than later, so you can see the funds in use.
No matter what’s driving the decision, consider the financial and emotional implications before gifting money to your children.
The impact of giving now on your future
The first and most important consideration is to examine any monetary gift in the context of your entire estate. It’s easy to get swept into an adult child’s pressing need or to be overcome with emotion when you’re thinking of passing on your legacy. However, you need to consider your own future first, and make sure you’re protecting your retirement years.
Whatever amount you’re considering giving or what its intended use, develop a gifting plan before making any decisions: how much, when and why. Seeing the whole picture can help you understand how much you can gift while keeping what you’ll need.
Reducing potential taxes with gifts
When it comes to your family’s immediate needs, gifts of cash or assets can potentially reduce your estate tax burden — one of the main motivators for parents considering giving money to children as an early inheritance.
For smaller gifts, the IRS rules for 2024 allow any individual to gift up to $18,000 per year to any recipient without having to consider the potential impact of a taxable gift. A married couple may give up to $36,000 to any individual.
Larger gifts may also sidestep tax liabilities if you’re willing to have them count against the lifetime estate and gift tax exemption, which for 2024 is $13.61 million for individuals and $27.22 million for married couples filing jointly.
Read more about who pays estate taxes, how much and when.
The ease of such a gift is beneficial for the recipient, but on the flip side, you’ve given up control of it. Watching your adult children spend money in ways you wouldn’t can quickly sour the joy and satisfaction of giving.
A trust offers structure and direction – but isn’t for everyone
For a little more control over the distribution, you may want toconsider a trust. In its simplest form, a trust is an entity, created and funded with cash, assets and investments, which allows you to dictate how your estate is distributed to beneficiaries.
Anirrevocable trust, in particular, may be useful if the value of your estate exceeds the lifetime exemption. Although they typically can’t be changed or amended after they’re created, the assets move out of your estate and taxes are paid out of the trust, which can give you greater protection from estate taxes if created properly.
Irrevocable trusts come in various forms, depending on the gifting goals. And although trusts may be adapted to handle many situations, they have limitations. As complex, legally binding arrangements, it makes sense to be aware of their benefits and drawbacks.
Benefits of gifting through a trust may include:
- The joy of helping your children and seeing their appreciation while you’re still alive.
- An unmatched level of control over gifts to children of any age.
- The flexibility to drive decisions on gifts and philanthropy.
- The option to arrange and structure funding for specific goals, such as lifelong care for children with disabilities.
- Potential tax advantages for beneficiaries.
On the other hand, drawbacks of gifting through a trust may include:
- Irrevocable means irrevocable, so whatever restrictions you create will carry on into the future. If you place too much in the trust too early, you may face limited access to cash down the road.
- Mandatory reporting rules in some states require that beneficiaries be informed about trusts and what’s in them.
- Incurring fees for trust administration.
When it comes to monetarily helping your adult children now while still preserving your legacy, a little planning can ease the way and ensure you’re giving the way you intended.
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