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How to Give Smartly

July 5, 2023

Whether you’re giving someone a financial gift or a treasured piece of jewelry, you’ll want to ensure your gifts incur the minimal tax burden. 

In this episode of “Simply Money,” Mark Reckman explains strategies for avoiding gift tax and discusses a few scenarios in which gift-giving may not be as ideal as you think.  

Episode Transcription

Amy Wagner: 

You’re listening to Simply Money, brought to you by Allworth Financial. I’m Amy Wagner, along with Steve Sprovach. For a lot of people I think one of the things that you might love doing when you have a little extra money in your bank account is being generous with it. I know that a lot of people that we work with, that becomes really important to them, especially later in life. The organizations that mean a lot, and maybe it’s your children, but how do you give gifts in a way that you make sure it’s the smartest way possible? Joining us tonight is our estate planning expert from the law firm of Wood + Lamping, Mark Reckman. Mark, let’s talk about these gifts, and I want to start with the thing probably closest to most people, which is your family, your children. 

Mark Reckman: 

That’s right. And gifts can consist of anything in the context of a family, frequently, a lot of things will change hands that people don’t really think of being a gift. But a gift includes not just cash, it includes stocks, bonds, real estate, jewels, cars. You buy a new car, you give your old car to one of your children. That’s a gift. And all gifts are treated the same under tax law, they’re treated the same way, whether they’re in cash or in kind, they’re treated the same way. 

Steve Sprovach: 

And Mark, I think this year, the amount you can give increased, is it $16,000 now? 

Mark Reckman: 

That’s right, Steve. So the way the system works is that the federal government taxes gifts, that’s the starting point, but there are significant allowances. So the first thing, the government’s position, the tax law says is we don’t care about de minimis gifts. We don’t care about the little stuff. And the little stuff is defined just as you said, $16,000 per person per year, and that’s $16,000 that you can give away. If you’re married, it’s another $16,000 that your spouse can give away for a total of 32. If you have a child that you’re trying to help you and your wife can each give 16, if that child is married, each can give another 16 to the spouse. Have to do that math in my head. But I think that comes out to- 

Amy Wagner: 

64. 

Steve Sprovach: 

You can give a lot of money away. And that’s not taxable, correct, to the recipient? 

Mark Reckman: 

Not only is it not taxable, Steve, it’s not even reportable. 

Amy Wagner: 

Wow. Let’s talk about too, just the thought process here, Mark, because for some people they want to give the money away in their will when they’re gone, but others want to be around to see the kids enjoy that money or spend it or the gift or whatever. Just talk about the thought process and how it differs between people depending on what they decide to do. 

Mark Reckman: 

Well, of course, it depends on the resources of the parent or the person making the gift. But frequently what you find is that young people, young couples, young families in particular have financial needs earlier in life, and us older guys are living longer. And if we wait to pass on our accumulated earnings until we die, our kids at that point may be mature themselves. And in fact, people are now living into their 80s and 90s fairly regularly. By that point, your children may be retired. Now, maybe not, but certainly they will be at a peak earning place in their lives. And so many people believe that it’s more helpful if they can make gifts to their children when their children have young kids so that you’re putting money aside for college or you’re paying for violin lessons or maybe the old family vehicle that your son drives is getting a little sketchy and it’s a safety factor. 

So you want to help put your kids and grandkids into a safe vehicle. And so that frequently means inter vivos. That’s the term we use for gifts you make during your lifetime. And so inter vivos giving, lifetime gifts are becoming more and more common with this generation. Now, there’s also testamentary gifts. That’s the term we use to describe gifts you make when you die. And of course, that generally is all of what’s left of your estate. Those things under the tax law are treated the same, whether you make a gift during your lifetime or whether you make a gift at your death, they’re treated the same. As Steve asked a minute ago, there’s no reporting, no interest. The government has no interest at all on the first $16,000 per person per year. But in addition to that, I should say on top of that, there’s a lifetime allowance, and that’s called the unified credit amount. 

And the lifetime allowance currently is just shy of $13 million per person. So that’s a million with an M, that’s a lot of money. And so for the vast, vast majority, 99% would be my guess of our listeners are never going to hit that amount. And by the way, that’s per person. And so if you are married, I can give the exact number is 12.92 million this year. This number is adjusted every year for inflation. I can give $12.92 million, that’s a combined total during my life or at my death tax free, and my spouse can give away that same amount tax free. You add that together, you’re up well over $25 million under today’s numbers. So for the vast, vast majority of us, gift taxes are not an issue. 99% of our listeners are not going to have any issue with… Now, that doesn’t mean you won’t have to file a return if you give away more than $16,000 per person per year, but the return is going to show zero tax. 

Amy Wagner: 

Let’s switch gears now, Mark, to charities, because I know that’s what a lot of people are interested in as well. Not just family, but charities. Is anything differ there as far as gifts to charities? 

Mark Reckman: 

Yes, because charitable giving does not apply, there’s no tax on charitable giving at all. And in your unified credit amount, that $13 million amount I talked about a moment ago, that does not include charitable gifts. So if I give a million dollars to Christ Hospital during my life, I do have to report that gift because it’s more than the $16,000 annual allowance we talked about before. But it will not reduce my lifetime allowance because it’s a 501c3 charity 501c3 is the section of the tax code that identifies charitable. Now, there’s all kinds of non-profits out there, guys. I’m talking about non-profit charities. There are nonprofits that are not charities like clubs, for example. Many of them are technically not charities, but a gift to a 501c3 declared charity does not reduce your lifetime allowance. And by the way, there are over one and a half million charities operating in the US currently. Many of them are religious related, churches and church religious affiliated charities, but there are a million and a half of them now. 

Steve Sprovach: 

Mark, I want to go back to something you said about types of giving during your life or testamentary through your will. And an important point, because I deal with a lot of retirees and they think it’s easier to start transferring assets to their kids. And I’ve even seen cases where, hey, I’m thinking of putting the house in the kids’ name so they don’t have to deal with it. There’s a major tax reason you may not want to do that. Would you talk about that a little bit? 

Mark Reckman: 

Well, that’s absolutely right, because there is a tax issue when you make gifts to non charities. So now we’re talking about gifts to kids or to family members. If you make that kind of a gift, the person who receives the gift assumes your cost basis. Now, what does that mean? Cost basis is what you paid to buy an asset. Now, when it comes to real estate, a cost basis is not only the purchase price you paid, but it’s also the cost of all major improvements. You add that together, that’s your cost basis. When you go to sell the property, if you sell it for more than your cost basis, you have a profit, and we call that a capital gain and capital gains are taxable. It’s a kind of income, and you do pay capital gains tax on that income. And when you make a gift to another individual, they assume your cost basis. 

So that if I have a home, let’s say for example, that I bought a home 30 years ago in Hyde Park for $250,000, and I’m living on Erie or Observatory, which I picked that neighborhood and that street, because that’s where values have gone up a lot in Cincinnati. 

Amy Wagner: 

Yes. 

Mark Reckman: 

Maybe that’s more than $50,000- 

Amy Wagner: 

Nice houses there. 

Mark Reckman: 

That’s right. And so maybe that house is worth, let’s say it’s worth a million dollars to pick a number out of the air. I’ve been living in it for 30 or 40 years. That house is worth a million dollars. If I paid 250, I’ve got a $750,000 capital gain. If I give that property to my children, their cost basis is 250. When they sell it, they’re going to have to pay capital gains tax on the difference. Now, there are exceptions. If they live in that house and it becomes their own personal residence, there’s a residence exemption. But my point is that they will assume my cost basis. That is not true- 

Steve Sprovach: 

And if they inherit it, it’s a different deal. Exactly. 

Mark Reckman: 

Bingo. That’s exactly right. 

Amy Wagner: 

Stepped up basis then, right? 

Mark Reckman: 

That’s right. And we call that a step up, as you just said, Amy. And the word step up means that the cost basis is adjusted to the value of the property on the day I die. And if my children turn around and sell it the next day, theoretically for the same price, they will have no gain at all and that capital gain never gets taxed. And so, Steve, you’re absolutely right. You got to be real careful about what you choose to give, because if you give an asset that has a very low cost basis, you may be passing along some unrealized capital gain that’ll hurt later on that could be avoided if you hung onto that. [inaudible 00:10:28]. 

Amy Wagner: 

What you give and when you give it. Great advice as always from Mark. Recommend of course, our estate planning expert from the law firm of Wood + Lamping. You’re listening to Simply Money here on 55KRC, The Talk Station. 

About the Author

Mark S. Reckman

Mark S. Reckman

Mark Reckman has been with Wood + Lamping since 1979

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