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Why You Should Make 2016 Gifts To Family Now

This article is more than 8 years old.

Families tend to think about gift-giving around the year-end holidays, but it actually makes more sense –and cents--to give early in the year. Market volatility may give gift givers pause, but it’s a potential opportunity to increase the impact of your gift. These are two reasons that Suzanne Shier, chief tax strategist at Northern Trust , is encouraging clients to make gifts to family members now.

By giving earlier in the year, any earnings benefit the recipient. “Over a period of time, if we have this habit of making gifts early in the year, our gifts can be more powerful for our beneficiaries,” Shier says. By giving stock with a depressed value, you can give more shares, and if there is a rebound, the recipient gets the advantage.

There are many reasons to make gifts to younger generations—it reduces the value of your estate for potential estate taxes (although the federal estate tax exemption is $5.45 million per person, 18 states and the District of Columbia have death taxes, with some kicking in on the first dollar you leave certain heirs). Grandparents or parents may want to help children or grandchildren with educational expenses, medical expenses, buying a car or first home. A more long-term strategy is to make gifts into a trust to build up a nest egg for the recipient’s future.

“Once you’re comfortable with your balance sheet, the sooner you give to your kids, the better,” says Jay Rivlin, an estate planner at McDermott, Will & Emery.

The basic rule is that each taxpayer can give any number of individuals $14,000 a year each without worrying about gift tax. They’re called “annual exclusion gifts” because they’re excluded from gift tax. Separately, there is a $5.45 million lifetime gift tax exemption that’s tied to the estate tax exemption. That’s a total amount that an individual can give away without being subject to gift tax or estate tax (assessed at 40%). Use it while you’re alive—or at death. The key point for the annual exclusion gifts is that they don’t eat into the gift/estate tax exemption.

The power of early gifting. Consider, for example, gifts made in January each year for 10 consecutive years, compared to gifts made in December (assuming 5% annual pre-tax returns; that might not seem realistic given the market is in free fall, but the point is to get in a habit). Say you give $14,000 annual gifts for 10 years. If you make gifts at the beginning of each year, you end up with $185,000. If you make the gifts at the end of each year, you end of with $176,000. The advantage of giving early in this case is an easy $9,000, figures Shier. That’s how much extra ends up in the donee’s pocket.

Stock gifts. Cash is easy; you just write a check. But stock gifts can add more punch. Say you had 100 shares of stock at $10 a share on January 1. Now the same stock has declined 10% to $9 a share. You can give more shares for the same annual exclusion amount. But you have to take into account your cost basis in the stock –what you paid for it—because your recipient gets your basis. The best stock for gifting purposes: undervalued stock with a high basis. Give energy or bank shares now, or wait until they fall further.

Get creative. You can supercharge gifts by giving shares of a family limited partnership or a limited liability company. “You can give more because you’re discounting the underlying assets,” Rivlin says. Other techniques that work well in low-interest rate environment are GRATs, intra-family loans and charitable lead annuity trusts.

Use the full annual exclusion amount. The annual exclusion amount was $10,000 from 1982 through 2001, and some folks still talk about $10,000 gifts because of that. Know the limits: for 2016, it’s $14,000. That’s been the amount since 2013. It’s indexed for inflation, and gets adjusted in $1,000 increments.

Splitting gifts. A married couple can give $28,000 a year together. Say they want to help their daughter and son-in-law buy a new SUV for their growing family that costs $56,000. The couple could give $28,000 to each of them. “You can definitely get some meaningful multiplier effects,” says Shier. If you split gifts, you’re supposed to file a gift tax return.

The Dec. 31 mistake. You give a child a check at year end, and they don’t cash it until the next calendar year. “That’s a problem,” says Rivlin. “You’ve lost that year of gifting.” The annual exclusion amount is per calendar year. The check cashing mistake is another reason to make gifts earlier in the year.

Other gifts. You can also pay college or private school tuition and medical bills as long as you pay the provider directly, and it doesn’t count against your lifetime gift tax exemption.

The 529 plan gift. You can front load a 529 college savings plan with five years of annual exclusion gifts per beneficiary at once. (You have to file a gift tax return reporting that you did this, although no gift tax is due).

The nest egg trust. For wealthy clients, Rivlin has them bypass funding 529 plans and pay tuition directly. That preserves the annual exclusion amount to help build up a nest egg trust. He typically helps clients set up these “Crummey” trusts when a new child is born. The parents (and other family members) can give $14,000 each; theoretically, the child has a limited window, say 60 days, to withdraw the money, but they don’t, so by the time they are grown, they could have a $1 million nest egg, subject to the terms of the trust. Alternatively, if you put the gifts in a custodial account for the child, it would be theirs outright to spend as they please when they turn 18 or 21, depending on the state.

Shier had a client who funded 529 college savings accounts for his grandchildren, but the balances grew so large, it didn’t make sense to keep funding the accounts. At that point, she helped him set up “Crummey” trusts for the grandchildren with a broader purpose—the grandkids will be able to access funds for education, to buy a home or pay down a mortgage.