Zachary D. Gildehaus, CFA, CFP®
Analyst, Client Needs Research

The winter months are a time for hot cocoa, warm fires and cozy sweaters. For many, it’s also a time for reflection, exchanging gifts and spending time with loved ones. Togetherness often inspires thoughts about purpose and the impact you want to have on your family and charitable causes you’re passionate about. Whether you have assets you’d like to share today or you have aspirations to be philanthropic in the future, there are five key things you can do now to work toward your giving goals. 

1. Define your goal. Often, individuals want to fund a specific expense for a loved one – like an education or down payment on a house. Maybe you’d like to pass a specific asset like a family business or real estate. Reflecting on and articulating these goals are a great first step.

Next, you’ll want to consider how your goals may affect your financial strategy and the trade-offs you’re willing to make. For example, are you willing to reduce your spending or delay retirement? While this may not be necessary, understanding the trade-offs you are (and aren’t) comfortable making can be helpful.

2. Consider timing. The timing of any gift can have important implications for current and future taxes and your own financial security. Spend some time considering whether you want to give assets during your lifetime or if you’d rather leave a financial legacy after you pass.

Giving now: Giving to a loved one now allows you to see the recipient(s) enjoy it. It can also remove the gift from your estate if given more than three years from before the time of your passing, potentially reducing the amount of estate taxes when you pass. If the money is being given to a charity, you may also be entitled to an income tax deduction if you itemize deductions on your tax return. That said, giving the asset now means you won’t have it available should you need it (for an emergency, for example)

Giving later: You may wish to leave money to an heir or charity after you pass away. Your heirs receive a step up in basis when inheriting your assets, which means the asset is revalued for tax purposes when you pass away. This could provide a lower tax bill for your heirs when they sell it as compared to giving it to them during your lifetime.

There are simple tools like beneficiary designations on retirement accounts or payable on death (POD) for bank accounts to help ensure your wishes are followed after you pass. Wills can help direct other assets to the recipients of your choice. For those with more complex needs, a trust may be appropriate because they can offer a greater level of control. Each of these documents are legally binding and can keep your money from being held up in probate (a legal process for distributing money after someone has died). Probate can be costly and time-consuming, and it identifies the recipients of your assets to the public.

3. Know the basics. Transferring your money to a loved one may seem like a straightforward process, but depending on who receives it and when, you could end up with a hefty tax bill. Knowing the basic rules is a helpful first step in forming your strategy.

Annual gift-tax exclusion: $16,000 (2022) / $17,000 (2023) – Each year, an individual can give up to the annual gifting limit to any number of other individuals. For example, each parent can give that amount to each of their children every year. This can allow you to pass wealth to loved ones over time without impacting your lifetime exception amount.

Lifetime gift and estate tax exemption amount: $12.06M (2022) / $12.92M (2023) – Every individual can leave up to the lifetime exclusion amount to heirs free of estate tax. If you give more than the annual gift-tax exclusion amount in any year, the exemption is reduced by a commensurate amount. A married couple each has this amount. When one spouse dies, it’s possible for the surviving spouse to assume any unused exemption amount from the deceased spouse.

Marital deduction – Married individuals who are U.S. citizens can pass unlimited amounts of assets between them both during life and at death.

4. Evaluate potential strategies. We recommend starting with the following strategies if they are applicable to your situation because they can be a more efficient way to transfer wealth.

  • Education exclusion – If you wish to cover someone’s education expenses, there is no limit to how much you can pay as long as you pay the educational institution directly. Money given first to the individual who then pays the institution is subject to the annual gift-tax exclusion amount.
  • Health care exclusion – Similar to education, if you pay a health care provider directly for qualified medical expenses, there is no limit to how much you can cover.
  • Five-year forwarding in 529 education accounts (529 plans) – A 529 plan is a tax-advantaged, education savings account designed to specifically pay for education. If money is given directly to a 529 plan, you can deposit up to 5 years’ worth of the annual exclusion limit per person. This means grandparents could give up to $80,000 each in 2022. Accelerating your giving in this manner allows for longer tax-deferred growth and may have additional income and/or estate tax benefits.
  • Charitable giving – You do not pay taxes when transferring money to a charity. In fact, you may be able to claim an income tax deduction, offset the required minimum distribution on your taxable IRA or not have to pay capital gains tax on appreciated securities.

5. Plan what to give. If you currently have assets you’re interested in giving, work with your financial advisor to consider which path may provide the most benefit. For example, questions such as has the asset gone up in value since you bought it, is it in a tax-deferred retirement account, and is the asset easily sold for cash may impact when and what you give.

Some assets may be better suited to provide for your retirement income, others may be best for giving to loved ones, and others to charity. This requires a holistic look at what’s most important to you, your financial strategy and your overall goals.

If your gifting goal is more aspirational in nature, work with your financial advisor on a strategy to get you there. We recommend first addressing your most critical needs, such as having an emergency fund, working to build an appropriate amount of retirement savings and paying down burdensome debt. While you may need to adjust your current or future spending to help meet your giving goals, there are strategies to fit your situation today and for your lifetime.

Zach Gildehaus, Client Needs Research

Zach Gildehaus joined Edward Jones in 2013. He is currently a senior analyst on the Client Needs Research (CNR) team where he focuses his research efforts on charitable giving and financial strategies for business owners.

Prior to CNR, he was a senior analyst in Investment Manager Research (IMR), where he spent more than six years. During his time in IMR, he covered both active and passive investment strategies across many asset classes.

Important information:

This content should not be depended upon for other than broadly informational purposes. Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.