The decision to contribute to charity or gift money to family members or loved ones is an incredibly personal one. 

Whether you already make a monthly or annual contribution to your favorite charitable causes, or you’re planning to contribute a portion of your estate to charity or family in the future, it’s a good idea to think about exactly where and how you want to use your money to make a difference.

There are plenty of benefits (both personal and financial) to giving away money while you’re still around to see their impact. However, incorporating giving as part of your estate plan is also a great way to use your savings to leave behind a legacy. 

We’ll cover the pros and cons of both kinds of giving, along with what to keep in mind when it comes to tax implications.

Clarifying Your “Why”

Whether to family, charity, or anything else, giving away money is often motivated by deeply-held values and beliefs. Before you make a charitable giving plan, it’s prudent to understand precisely why you’re doing it. 

In general, you shouldn’t expect a tangible return in the form of accolades or thanks when it comes to gifting money. This is especially important to keep in mind if you’re giving to family or small charitable organizations.

However, that’s not to say that retirees donating to charity or gifting money to loved ones don’t reap any rewards. On the contrary—giving is often associated with increased feelings of financial fulfillment and contentment since you’re able to see the impact of your wealth firsthand. 

Whether you’re planning to gift a generous portion of your estate to a family member or just make a modest contribution to a charity of your choice, giving away money has personal and emotional rewards that go far beyond the financial.

The Tax Implications of Giving Money Away Now

If you plan on gifting money while you’re still alive, it’s essential to understand the tax implications, both for you and the charity or individual of your choice. In particular, if you plan to gift money to an individual, you’ll need to keep the gift tax rate and annual and lifetime exclusions in mind. These include:

• $15,000 annual gift tax exclusion per individual recipient
• $11.7 million lifetime gift tax exclusion per individual recipient
• 18% to 40% gift tax rate after you exceed the lifetime exclusion

In 2021, the gift tax exclusion for an individual is $15,000. This means that as long as your gift is under $15,000 per year, you won’t have to report the gift to the IRS. Whether you plan to set up a fund for your grandchildren, help your children out with expenses, or just gift a generous sum to a friend or loved one, as long as you stay under $15,000, you won’t have to file a gift tax return. Some expenses like direct payments to higher-education institutions or medical facilities don’t count toward this limit.

Even if you do exceed the $15,000 limit and have to file a return, you probably won’t have to pay taxes on the amount. This is because there’s also a lifetime exclusion limit for financial gifts. 

In 2021, the lifetime exclusion limit is $11.7 million. Any gift you give each year that exceeds the $15,000 limit must be listed on a gift tax return and counts toward your $11.7 million lifetime limit. This limit is per person, which means that the vast majority of retirees won’t run afoul of the lifetime exclusion limit and be required to pay taxes.

If you’re lucky enough to gift over $11.7 million, you’ll pay tax on any amount over the limit ranging from 18% to 40%, depending on your specific financial circumstances. If you don’t make any gifts to individuals during your lifetime, this means that you have the total lifetime exclusion limit to use up via your estate.

The Tax Implications of Giving Away Money as Part of Your Estate Plan

If you plan on giving away money as part of your estate, it’s still important to keep taxes in mind to maximize your gift’s impact. When including financial gifts as part of your estate plan, the first step is to determine how you’ll give these assets away when you pass. Some common ways include:

• Trusts
• Inherited IRAs
• Assets from a 401(k)
• Life insurance policy
• Bank accounts
• Investments
• Other retirement accounts

When preparing your estate plan, you should consider the tax implications from the point of view of your beneficiary. By minimizing their tax burden, you’ll be able to ensure that your financial gift goes further. 

It’s a good idea to speak with an estate planning attorney and a financial planning team to ensure your assets and wealth don’t end up in probate and to minimize the tax impact of your estate plan for your loved ones. 

If you’re interested in estate planning, we’d love to help! Get in touch with us today to learn more about our services.