Insider Jeff Fleming

The Do's & Don'ts of Gift-Giving

One of the greatest joys for parents and grandparents is providing for their children and grandchildren--helping them succeed or survive difficult financial times when necessary. Making a financial gift sounds easier than it is, however. Jeff Fleming reviews the three most important questions you should ask yourself before making a gift.

1. Can I Afford to Make a Gift?
This seemingly obvious question is often overlooked or ignored, yet it should be determined in advance. Parents want to see their children succeed, and this concern often outweighs their consideration for their own finances.

Remember, you can make annual gifts up to $10,000 to as many recipients as you choose. So, if you have five children, you can gift $50,000 during the year. If you exceed this amount, then gift taxes could be owed.

2. What Should I Give?
Selecting the right property to gift is another important decision. Consider these factors:

If part of the aim of gifting is to reduce estate taxes, then choose property that you expect to substantially appreciate in value. That way, you gift at a time when the value is low and avoid estate taxes at your subsequent death when the value is much higher (assuming that it does, in fact, appreciate).
Property that the recipient does not intend to sell should also be used for gifting. The reason is this: the recipient receives the donor's tax basis in the property and will owe taxes accordingly. This is an important distinction from transfers of property at death or upon a sale where the recipient receives a stepped-up basis equal to the market value of the property at the time of the transfer. The higher the basis, the lower the taxable gain that will be realized upon the sale of the property.
Finally, consider gifting property that is generating a high income to shift the income tax burden to the recipient.

There are also properties that shouldn't be given away. For instance:

Property with values that are expected to decrease
Property that the grantor intends to use after gifting
Transfer of U.S. savings bonds may provide an unsuspecting grantor a shock: gifting these bonds triggers the immediate recognition of the untaxed appreciation.

3. When Should I Give?
Timing is the final important consideration in developing a gifting strategy. If you anticipate making a gift, then try to time the gift so that it is made during a dip or low point in the market. Even deathbed gifts are allowed and should be considered to reduce federal estate taxes.

There is much more to gifting than handing your child or grandchild a check. Let's see how the rules work for a specific question from one of our members.

Sending the Grandkids to College