Now that the long-debated estate tax rules have finally been settled, let’s get real: Despite all the hoopla raised, most people probably would never be impacted whether the lifetime estate tax threshold had stayed at $5.12 million or reverted to $1 million. In the end, it actually went up a bit to $5.25 million for 2013.
Even if your estate will only be a fraction of that amount, it still pays to have a plan for distributing your assets.
If your finances are in good shape, there’s no reason not to start sharing the wealth while you’re still around to enjoy helping others. It also doesn’t hurt that you can reap significant tax advantages by distributing a portion of your assets now.
Before you start doling out cash, however, make sure you are on track to fund your own retirement, have adequate health insurance, can pay off your mortgage and are otherwise debt-free. You wouldn’t want to deplete your resources and then become a financial burden on others.
If you can check all those boxes, consider these options:
Avoid the gift tax. You can give cash or property worth up to $14,000 per year, per individual, before you’ll trigger the federal gift tax. (Married couples filing jointly can give $28,000 per recipient.) You’ll probably never have to pay a gift tax, however, since you’re allowed to bestow up to $5.25 million in gifts during your lifetime above and beyond the annual $14,000 excluded amounts before the gift tax kicks in which for most of us means never. Read IRS Publication 950 (at www.irs.gov) for details.
Pay for education. If college is still far off for your children, grandchildren or others, consider funding a 529 State Qualified Tuition Plan for them. Any interest the account earns is not subject to federal (and in most cases, state) income tax; plus, many states offer tax deductions for contributions made to their own 529 Plans. And don’t worry: If one child decides not to attend college, you can always transfer the account balance to another without penalty.
Roth IRAs for kids. If your minor children or grandchildren earn income (allowances and gifts don’t count), you may fund a Roth IRA on their behalf. You can contribute up to $5,500 or the amount of their taxable earnings for the year, whichever is less. Your contributions are made on an after-tax basis but the earnings grow, tax-free, until the account is tapped at retirement.
Fund someone’s benefits. Many people cannot afford health or other insurance and so forego coverage, putting themselves just one serious illness or accident away from financial disaster. Many also can’t fund their 401(k) plan or IRA. Consider applying your tax-exempt gifts to help loved ones pay for these critical benefits. You’ll not help protect them from catastrophe, but also greatly increase their long-term financial self-sufficiency.
Charitable contributions. If you’re planning to leave money or property to charities in your will, consider beginning to share those assets now, if you can afford to. You’ll be able to enjoy watching your contributions at work — and be able to deduct them from your income taxes. Read IRS Publication 526 for details.
Before taking any of these actions, consult your financial adviser to make sure your own bases are covered.
If you don’t have an adviser, go to www.fpaforfinancialplanning.org for help locating one.
Jason Alderman directs Visa’s financial education programs. Follow him on Twitter at PracticalMoney.