Give to Loved Ones and Charity During Your Lifetime or After

Christine Benz: Hi, I'm Christine Benz for Morningstar. What's the best way to help loved ones financially? Joining me to discuss that topic is Maria Bruno. She is head of U.S. wealth planning research for Vanguard.

Maria, thank you so much for being here.

Maria Bruno: Thanks for having me, Christine.

Benz: Let's start with kind of a basic question, but I think it's one that many people wrestle with, especially older adults. If they have loved ones, often adult children, who they want to help financially, are they better off doing it while they're alive or passing these assets through their will or beneficiary designations, passing these assets after they're gone? How should people approach that really important question?

Bruno: That's a really good question and very common, I think, for many retirees. I think my first suggestion there would be, first and foremost, make sure that you go through and run the numbers and that you have the financial security to be able to do that.

Benz: To give during your lifetime?

Bruno: Exactly right. Retirees want to make sure, first and foremost, that they have their retirement security accounted for, not just for today, but also looking down the road in terms of healthcare costs or if there's long-term-care considerations. So, you want to make sure that you actually go through and get a good sense that financially you're able to do that during your lifetime. And then, from there, if that's the case, then really think through, OK, well, what are the benefits of doing that during my lifetime or passing these assets, potentially if they've grown over the years, when you pass away. So, there's some trade-offs there.

I think some individuals really value the benefit of giving it during their lifetime. Maybe there's a situation where their children or grandchildren may need the money now, or maybe they actually want to share the enjoyment of passing that money and sharing in the enjoyment of that gift while they're alive. Those are sometimes the key drivers of wanting to do that while someone is alive rather than passing those assets at death.

Benz: Right. And you said that it is key to look at whether you can financially afford to give during your lifetime. Beyond that, you think it's also important to think about why you're giving and to whom. Can you talk a little bit more about that? For some older adults, it might be perfectly clear why and to whom, but can you talk about why that thought process is important here?

Bruno: The first thing would be: One--to make sure you can do it, right? You're financially secure; it makes sense to do that. Then think about, well, who do you want to give? Is it children? Is it grandchildren? Is it both? And then why or for what goals? So, for instance, if it's grandchildren and you want to pay for their college education or contribute to their college savings, think about maybe making contributions to their 529 college savings plan. And the reason for that is there are often state tax benefits for contributing to these types of plans and then the beneficiary, the child, actually, that account, then will grow tax-deferred and if you use it for college purposes, it's tax-free. So, with that, you have the gift and you have the beneficiary in mind, you have the purpose of that money and you know that that money is going to go toward college education.

In other situations it might be--perhaps you might have children who are impacted by the economic conditions this year, maybe they're furloughed or have some job challenges or income challenges, and retirees or parents or grandparents might want to help them out. And in those situations, maybe a direct contribution of either cash or maybe some type of--you have appreciated assets, for instance, maybe transferring those over to your children. The benefit to that is if they're in a lower tax bracket and they were to go to liquidate them down the road, then potentially they may pay less in taxes. So, you've got some flexibility in terms of why you want to contribute and to whom, and then how do you actually mechanically do that.

Benz: You want to be thoughtful about which of your assets you give to others. I want to talk a little bit more about that, Maria. You mentioned this idea of appreciated assets, and one thing that is potentially swirling out there is some changes to the estate tax laws. This would be a really major change but would take away that step-up in basis that heirs receive when they inherit assets from deceased people in their lives. Can you talk about that, talk about how people should think about perspective changes to that, to the step-up, as well as estate tax laws more broadly? How should people factor them into their plans?

Bruno: It can get complicated, right, because you think about income tax implications but also estate tax implications for those who are wealthier. The one thing I would say is, if you do annual gifting, there is an annual gifts tax exclusion amount each year. So, currently, it's $15,000 for 2020. It's the same for 2021. Which means that you can give to an individual $15,000 without contributing to your lifetime exemption amount. That's the amount that would be exempt from federal estate taxes. You can always give more. You're not capped at gifting that amount annually. But if you do, then realize that you are then eating into this lifetime exemption amount. Currently, it's set at $11.8 million for an individual. So, it's very, very high currently. But one of the proposals out there is to lower that and potentially lower that significantly. So, that's one thing to keep in mind.

Again, that is per donor, per donee. If you have a married couple, they can do gift splitting, which is $30,000 per child, for instance, or per individual. So, for instance, if a family has three children, they can give a total of $90,000 in total to the three children, split among the three children evenly, and then that doesn't eat into the lifetime annual exclusion amount.

Currently, when assets pass through death, for instance, taxable assets, there's a stepped-up basis, meaning that the basis resets at the time of death and the beneficiary gets that market value and the basis is the market value at that time. There are some proposals that could eliminate that. So, my caution there would be, no, maybe understand what's out there, but certainly talk to a tax advisor or an estate planning professional. If you're in a situation where you're triggering some of these nuances, be really careful in terms of understanding what could happen because now you're getting into estate planning considerations and sometimes income tax and estate tax considerations compete with each other. So, maybe you might want to if you're doing some significant moves, maybe wait until we have more clarity before executing on those.

Benz: You referenced that gift tax exclusion, Maria, and I feel like this creates so much confusion where people think, "If I give a gift in excess of that, I'll automatically owe taxes in that year, that will somehow add to my tax bill." That's not the case, right? Can you clear that up?

Bruno: Yes. And that's a good one to clarify. So, no, you're not taxed on it. You can certainly give more; it's just you have a lifetime exemption. And to the extent that you gift on an annual basis more than this exclusion amount, then you're actually dipping into that lifetime exclusion. When you're calculating estate taxes, for instance, down the road, you have to then go back retroactively and look at these gifts. You do tax filing along the way and report whether or not you've exceeded that amount. If so, then it's netted out. So, it's not a direct tax in any given year, nor are you prohibited from giving more. Just realize that you are using part of your lifetime exclusion amount if you're gifting more than the annual exclusion.

Benz: Maria, it's always so great to hear your perspective. Thank you so much for being here to share your insights.

Bruno: Thank you. Thanks for having me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.