Jeff Brown writes a biweekly blog about the Sandwich Generation and the financial issues its members face as they try to help their parents and their adult children. The blog appears on Next Avenue and on the website of the public television show Nightly Business Report. A highly respected financial journalist, Brown brings personal expertise to the subject because he is part of the Sandwich Generation.
Any kid would be glad to get an envelope full of cash for the holidays, but sometimes their parents or grandparents have really big gifts in mind. So you may be wondering: What are the ins and outs of transferring substantial sums to family members — not just to younger ones, but to your own parents as well? And what’s the best way to give a physical item of significant value, like a car?
It’s a big subject and I won’t pretend to cover every detail here (you may want to talk with your accountant or financial planner for personal advice). But I can help by raising the kinds of questions that need to be answered.
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3 Concerns for Family Giving
There are three immediate considerations: the tax consequences, whether you’ll retain any control over how your gift will be spent or invested and matters of fairness and family politics.
The first step for making a gift to a family member is to have a clear purpose in mind.
So ask yourself these questions — it will make the tax, control and fairness issues a little easier to navigate:
- Are you giving because you want to help your grown children or parents who are struggling to make ends meet?
- Do you want to teach your children or grandchildren how to manage money?
- Are you trying to reduce the size of your taxable estate?
- Do you want the money to be used for a specific purpose, like a down payment on a home or the upfront costs of an assisted-living facility for your parents? Or are you making the gift with no strings attached, just to help a loved one enjoy life or be better equipped for a rainy day?
Tax Rules for Giving to Relatives
Tax issues related to gifts are complex, especially now, thanks to the fiscal cliff negotiations in Washington. So I’ll just describe the current rules; be sure to pay close attention to the final tax deal between President Barack Obama and Congress if you’re planning to make a big gift after Jan. 1, 2013.
Federal law allows each individual to give someone as much as $13,000 this year with no gift taxes due for either the giver or recipient. That means a married couple can give up to $26,000 to a child or grandchild, tax-free.
(MORE: Sandwich Generation’s Mortgage-Deduction Debate)
Giving away money can help you avoid or reduce estate taxes, which can take an enormous bite out of your assets when you die. That’s one reason it has been a common technique among well-to-do parents and grandparents.
Currently, the federal estate tax kicks in only when an estate exceeds $5.1 million. This threshold is scheduled to drop to $1 million on Jan. 1 if the Bush tax cuts expire as scheduled, but that seems quite unlikely. (Pundits are predicting the fiscal cliff deal will include a compromise, taxing estates somewhere between those two figures.)
Tax issues also come into play when deciding whether to give cash or an appreciated asset, like shares of stock or real estate.
If a grandparent, for example, were to give a grandchild a block of stock or a vacation home purchased cheaply decades ago, the tax on the accrued gains would be paid by the grandchild after the asset was sold. But if the grandparent instead sold the shares then gave the grandchild the money, the grandparent would pay taxes on the capital gains.
In that case, a grandparent might prefer to let the grandkid pay the tax, especially if the child is in a lower tax bracket. (The Motley Fool website has a good explanation of some of the finer points of giving away stocks.)
Controlling Your Gifts
When it comes to giving, issues of control are no less complex than taxes.
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Generally, a true gift is “irrevocable,” meaning you can’t get the money back. But there are two ways you can retain some control.
If you’ll be making the gift to a minor (typically, a child under 18), you can set up a custodial account that you manage. This is a simple process available at any bank, brokerage or mutual fund company. The recipient gets complete access to the gift upon becoming an adult.
Another way to retain control of the gift is by setting up a trust for either a child or an adult. This lets you put some strings on how the money can be used or to have the power to manage it.
A trust is often used when grandparents would like to reduce their estates but also want to make the investment decisions for managing assets they give to young children or teenagers. A trust may also be worth considering if you have doubts about the recipient’s ability to handle money.
Giving a Kid a Car
If you’d like to give your old car to your child or grandchild, keeping it simple is probably best.
Signing over the title is easy and there are unlikely to be any messy gift-tax issues unless the auto is worth more than $13,000. (In that case, consult your tax adviser.)
So do what you think is best. Give away the car outright or sell it to the kid at a bargain price.
Remember, once you give away the car, it’s the recipient’s legal property. You can’t get it back if you decide your child is a reckless driver.
Fairness and Giving
For many people, the big issue about giving to family members is fairness. If you give your car to grandchild A, what do you do for grandchildren B, C and D?
What if you have two children and the first has one child and the second has three? If you were giving money to your children you might hand out equal amounts, but if you do that for each grandkid, will your son or daughter with the single grandchild feel shortchanged?
What if you have a child or grandchild in deep financial trouble but with siblings who are well off? Should you give equal sums to all, or focus on the greatest need?
It’s enough to make Solomon scratch his head.
Every family’s politics and finances are different, so there’s no single set of operating instructions.
But I think there will be fewer ruffled feathers if you establish a firm policy for family gifts, let everyone know your reasoning, then stick to it.