Giving while living

Sharing your financial legacy with family while you’re alive has advantages.

Article published: April 17, 2023

“Giving while living” is a phrase associated with billionaire philanthropists, but there are compelling reasons to share your wealth while you’re alive even if you aren’t a billionaire.

Gifting when it's needed

One reason for “giving while living” is so your loved ones can use your wealth at the very time they need it. For example, your child needs help buying a home because his or her family is expanding. Or perhaps your child needs help paying for your grandchildren’s day care.

The easiest way to transfer your wealth during your lifetime is by gifting outright, e.g., giving a check or wiring money into an account.

The IRS’ annual gift tax exclusion for 2023 is $17,000 for individuals, or $34,000 for a married couple, with any higher amounts needing to be reported on a federal gift tax return, but you very likely won’t actually pay any taxes. That’s because those reported amounts will count toward your lifetime estate and gift tax exemption amount, which is a generous $12.92 million in 2023.

Let’s say you gift your child a $100,000 down payment on a home, then $83,000 of the payment ($100,000 – $17,000) will need to be reported and will count toward your federal estate tax exemption. Keep in mind, that still leaves a lot of the federal tax exemption unused.

However, not all gifts need to be reported. Payments for medical expenses and tuition are exempt from the federal gift tax. So long as you pay the invoices directly, you can help children or grandchildren avoid student debt or pay for the health care of a loved one with a chronic illness without those gifts being taxable.

Test drive your legacy

“Another reason to give to your loved ones while you’re alive is to test if they will be responsible stewards of your wealth,” says Erin Gilmore Smith, a director of estate planning at Edelman Financial Engines.

Example: Before leaving your grandchild $200,000 after you pass, you may want to give him or her $20,000 while you’re alive. Will they fritter it away on clothing and parties or will they invest it? You can also test a charity in the same way to determine whether they use your donations in the way you intended.

There are estate planning vehicles that enable you to control the wealth you transfer while you’re alive just as when you pass. The money you give to a minor can be held in a custodial account until the child becomes a legal adult. You can also establish an irrevocable trust that distributes your money to loved ones for specific uses and times during your lifetime.

A third reason to share your financial legacy while you’re still alive is an intangible but equally important one: to experience the joy of doing so. You may want to treat your family to an all-expenses paid, first-class tour of Europe or maybe it’s a weekend at Disneyland.

“You want to experience the joy of sharing your financial legacy,” says wealth planner Michelle Muhammed. “But you also want to make sure you can do so without putting your retirement at risk. Longevity risk – the risk of outliving your savings – is real.”

The information regarding estate planning should not be construed as tax or legal advice and is for general informational purposes only.

 

Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.