In the ever-evolving landscape of wealth management, how can parents best support their children and grandchildren financially during their lifetimes? While the desire to make a positive impact is evident, navigating the tax implications of such generosity can be complex. Fortunately, several strategies exist to facilitate paying lower taxes, while maximizing the benefits for donors and recipients. Based on Kiplinger’s article, “Three Ways to Give to Your Kids Tax-Free While You’re Still Alive,” we explore three strategies for giving to consider in your estate planning.

First off, it is important to understand the differences for your children between receiving a gift from you during your life and inheriting it at your passing. When you purchase an asset (stock, real estate, personal property), the price you pay for it is your “basis.” If you later sell the asset, the difference between the price you sell it for and the price you paid is your “gain.” What you will be taxed is determined by how this gain is calculated. Beneficiaries of assets that have increased in value have traditionally received a break if the IRS calculates gains based on the inherited value (i.e., the basis calculated as of the fair market value the day it was inherited), not the decedent’s basis. The inherited asset’s higher valuation is considered a “stepped-up cost basis” and results in lower taxes. On the other hand, when you gift assets during your life your beneficiaries receives your basis which may lead to higher taxes when they go to sell the asset.

Don’t worry, tax basis is just one consideration among many for how to lower taxes for you and your beneficiaries. We explore more below.

How Can Estate Planning Eliminate Capital Gains Tax?

One estate planning strategy leverages possible tax breaks on capital gains.  You can give to your children during your lifetime and get capital gains tax breaks if the recipient’s taxable income falls below certain thresholds. If a single child’s taxable income is below $47,025 or a married child’s is below $94,050, they may pay zero capital gains tax upon selling the asset. Note that these lower taxes apply to capital gains and be careful to not allow your gift to push them above the threshold. Estate taxes are a different story and are explained below.

Which Estate Planning Strategy Maximizes the Gift Tax Exclusion?

The gift tax exclusion allows individuals and married couples to give money to a child and maximize tax efficiency. Individuals can give money directly to a child, for the down payment on a home or for a wedding, as a gift and if that gift is below the annual exclusion amount it doesn’t count towards your lifetime exclusion. In 2024, the annual exclusion amount is $18,000 per recipient or $36,000 for married couples engaging in split gifts.

With the lifetime federal exclusion set at $13.61 million per person for 2024, most individuals can engage in tax-free giving without exceeding their lifetime allowance. However, the current federal exclusion sunsets at the end of 2025 and we don’t know what congress will do for 2026.

How Can Direct Payments Impact Giving to a Child in My Lifetime?

Specific expenditures, such as educational or medical expenses, paid directly to institutions rather than to your children, are excluded from the annual gift limit and lifetime exclusion. This direct payment strategy allows donors to support significant financial obligations, such as college tuition or medical bills, without impacting their gifting allowances. Donors can provide meaningful support to their children and grandchildren while minimizing tax implications.

While maximizing lower tax giving is essential, assessing the broader impact of financial support on recipients is essential. Money has the potential to be a great help to your children, but giving without considering the consequences can also do great harm. By incorporating gifts into a comprehensive financial plan, donors can align their generosity with their financial objectives and ensure sustainable support for future generations.

Key Tax-Free Giving to Children Takeaways:

  • Capital Gains Considerations: Take advantage of tax breaks to give to a child in your lifetime.
  • Giving under Annual Exclusion: Maximize the tax advantage of giving money to a child during your lifetime.
  • Paying for College: Transferring money directly to a child’s college does not impact the gift tax exclusion limit.

Conclusion

Tax-efficient giving allows affluent parents to support their children and grandchildren and lower taxes. Implement gifting strategies and consider the broader financial impact to leave a lasting legacy and support loved ones. Book a call with our experienced estate planning attorneys in St. Louis, Missouri today to discuss these and other estate planning strategies.

Reference: Kiplinger (April 10, 2024) “Three Ways to Give to Your Kids Tax-Free While You’re Still Alive,”