I know. This sounds obnoxious. But one of my top financial priorities these days is giving away the wealth I’ve accumulated.
What most rich folks do is hoard everything they’ve got until they croak. Then they have it distributed post-mortem by lawyers working with trusts and wills.
From everything I’ve seen and read, this is a terrible idea. The good feelings you imagine your benevolence will engender most often devolves into bitterness, resentment, and altercations among those you leave behind.
I like what Warren Buffett did when he was about my age. He gave a huge chunk of his wealth to Bill Gates’s charitable foundation. Buffett understood that giving away billions was an enormous responsibility. So rather than simply naming some charities in his will, he put the money in the hands of someone he trusted to put it to good use while he (Buffett) was still alive.
K and I have the same general idea: We want to give away most of our money while we are still alive. We are assigning some assets to fund several charities that the family foundation currently manages. (So they will be self-funded in perpetuity.) And we’re putting other assets into the family limited partnership, which will be directed by our sons. But we are also in the process of giving away money to friends and family members. This we are doing with the help of legal counsel.
Not surprisingly, the IRS has restrictions on how much you can give away and to whom. These encumbrances are embodied in the tax code. If you exceed those limits, you (not the recipient of your gift) must pay a tax on it. And, yes, that means you have to pay a tax on money that has already been taxed.
The current limit on yearly gifts is $15,000 per person. So as a couple, K and I can give $30,000 a year to whomever we want without incurring a gift tax.
This is not a problem if you and your spouse want to give, say, $90,000 to your ne’er-do-well brother John. You can do it, tax-free, in 3 years. But if you want to give him enough to keep him in spam sandwiches and reefer for life, you may want to give him $300,000. That will take 10 years.
In our case, $30,000-a-year gifts won’t make a dent in the amount of money we want to disburse. And happily, there is a way to do what we want to do withou tpaying yet another tax on our money.
It’s called the “lifetime gift tax exemption.” Here’s a summary of what I’ve learned about it: READ MORE
What is the gift tax?
The gift tax is a tax on the transfer of money or property to another person while getting nothing (or less than full value) in return.
Many people don’t get hit with this tax, because the IRS generally doesn’t care about what you give away to other people unless it exceeds some lofty amounts. And even if it does, it might mean you just have to fill out some paperwork.
How much can you gift?
Two things keep the IRS’s hands out of most people’s candy dish: the $15,000 annual exclusion (in 2019), and the $11.4 million lifetime exemption (in 2019). Stay below those numbers and you can be generous under the radar. Go above, and you’ll have to file a gift tax return — but you still might avoid having to pay any gift tax.
How the annual gift tax exclusion works
* In 2019, an individual can give up to $15,000 in cash or assets (e.g., stocks, land, a new car) to someone and generally not have to deal with the IRS about it.
* If you give more than $15,000 in cash or assets to someone, you have to file IRS Form 709. That doesn’t mean you have to pay a gift tax. It just means you have to disclose the gift.
* The annual exclusion is per recipient. It isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to a neighbor, and so on.
* The annual exclusion is also per person. Which means that if you’re married, you and your spouse could give away a combined $30,000 a year to whomever.
* Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.
So that’s what you need to know about the annual gift tax. But there’s something else: the “lifetime gift tax exemption.”
How the lifetime gift tax exemption works
On top of your $15,000 annual exclusion, you get a lifetime gift tax exemption – $11.4 million in 2019. (Double that for married couples.) What that means is that you can go over your $15,000 per person annual limit without incurring a gift tax – so long as the total amount that you gift to everyone during your lifetime does not exceed $11.4 million.
Let’s say you want to help your sister Susie buy her first home. If you give her the $50,000 she needs for a down payment this year, you’ll exceed your $15,000 annual exclusion. But that’s okay. The first $15,000 of your gift will not be taxed because of the annual exclusion. And the additional $35,000 will not be taxed because it will be applied to your $11.4 million lifetime exemption.
The bottom line…
Check with your accountant for specific information on how the gift tax, the gift tax exclusion, and the lifetime exemption may apply in your particular situation.
Meanwhile, if you’re fortunate enough to be sitting on more money than you will ever need, consider starting to make annual gifts to your loved ones. Not only will you have the pleasure of watching them enjoy it… it’s a good way to reduce your taxable estate without any negative side effects.
