When you’re approaching retirement, many people face three important concerns: reducing their tax liability, ensuring they have enough money to last throughout their retirement, and leaving a legacy to their children. One opportunity for addressing these three concerns is gifting.

The Tax Benefits of Gifting

Gifting is an estate planning strategy where you “gift” a portion of your estate to your loved ones as a way to reduce the hefty estate tax you’ll face in the future when you transfer your estate to your heirs. Under federal law, you can give away $5.45 million in your lifetime without being subject to gift and estate taxes. The annual limit for gifts is $14,000 per recipient for 2016. If you’re married, you and your spouse can each gift $14,000. If you plan to give more than that, you are not subject to immediate taxes, but gifts over $14,000 in a year will be deducted from your $5.45 million estate tax exclusion.

For high-net-worth families, this can be considerably helpful in reducing the size of their taxable estate and their income tax liability. Even if you’re concerned about your financial security, it may still make sense to transfer your wealth to your heirs or a charitable cause during your lifetime instead of after your death. When federal estate taxes can reach 40%, the cost of doing nothing now may result in the loss of thousands of dollars in taxes down the road. Reviewing your financial condition with your advisor may help you determine that gifting now makes more financial sense.

Strategies for Smart Gifting

There are multiple ways you can gift to your loved ones. Determining the most appropriate strategy for your situation can help you reduce the size of your taxable estate (which will benefit your family in the future) and reduce your income tax liability now (which will help come tax filing time early next year).

While everyone’s financial circumstances and goals vary, there’s no simple answer for how to gift. However, there are a few strategies to consider:

Gift Cash

The simplest and most obvious option is to gift your children cash. This may be a good option if your kids are adults. If your kids are young or under the age of 18, you may set up a savings account for them in their name but that they can’t access or that you can monitor.

An alternative is to set up a trust. While you’ll have to pay legal fees to set it up and monitor it, you’ll have some control over the assets and can safeguard them from creditors and family members you don’t want to access the funds yet.

Gift with a 529 Plan

There aren’t many ways around the annual gift tax exclusion limit, but one important strategy to lower gift taxes is by gifting with a 529 college savings plans, which may be a good option if you have young kids. A 529 plan is a popular way to save for higher educational expenses because the growth can be used for college tuition and qualified expenses tax-free.

Currently, individuals are allowed to front-load 529 plans with five years’ worth of gifts at once. That means that a married couple can gift $140,000 into a 529 plan at once without having it affect their lifetime exclusion. This is particularly significant if they have multiple children or grandchildren, as the limit is $140,000 per recipient. Following that gift, they will not be able to gift any more money to that specific beneficiary during the 5-year period.

Gift Stocks

Another option is to gift stock that has appreciated in value and pays high dividends. This can be an appropriate choice for families in a high tax bracket, as gifting this stock helps you avoid paying taxes on the gain and transfers the taxable dividend stream to your children.

Your kids can either sell the stock and pay taxes on the gains based on what you paid for it or keep it. An added benefit to this strategy is that it can help your kids get started investing and learning the value of interest and saving.

Gift Payment to Cover Medical Expenses

Similar to tuition, dental and medical expenses are exempt from the annual $14,000 gifting exclusion. If your child faces steep healthcare costs, such as orthodontia, surgery, or insurance premiums, you can foot the bill and also gift up to $14,000 without facing a federal gift tax.

In order to qualify for the medical exclusion and deduct the expenses for income tax purposes, payments must be made directly to the hospital or institution that provides medical care to the gift-recipient, or to the company that provides health insurance to the individual.

Gifting Before December 31st

If you have yet to gift to your loved ones this year, there’s still time! You have until December 31st to gift for 2016. To make the most of your gift, it’s important to understand the tax forms you’ll need when filing, what guidelines you need to follow, how to gift, and through which means to gift. This is why it can be helpful to meet with a financial advisor to discuss a personalized strategy that is most appropriate for your situation and goals.

If you’re interested in learning more about how gifting can tie into your estate and tax plans and which smart strategies may work for you, we encourage you to contact us today. We’d be happy to meet with you to review your options for gifting before December 31, or develop a plan for ongoing annual gifting. Give our office a call at (323) 254-3072 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. to schedule a consultation.

About Brent

Brent M. Mason is the President of Mason & Associates, Inc.  Brent began his career in 1999 with Putnam Investments, where he was a vice president and served as the marketing manager for Putnam’s Insurance Products Division, specializing in the development and sale of investment vehicles within insurance related products. Brent earned a Bachelor’s Degree in Business Administration from Southern Methodist University, in Dallas, Texas where he focused on marketing and finance. Brent is a licensed California insurance agent and can offer life, health, variable and long-term care insurance products. Currently, he is a member of the Board of Directors at Hillsides, an organization that specializes in meeting the needs of at-risk children in the greater Los Angeles area. Brent lives in Pasadena with his wife Leah and their three beautiful children. He enjoys golf, snow skiing and spending time with family and friends.