Creating an estate plan is vital for parents seeking a smooth distribution of their property to their children while also making sure those assets are passed according to their wishes.
Many only think about where their property goes when they die. Fewer people consider giving at least some of those assets away while they’re still alive, but it’s worth considering the pros and cons.
Is it worth it? The short answer? Yes! If you’ve got a lot of cash, it’s one of the best times to transfer money to your kids without paying taxes. The federal transfer tax exemption allows you to give away:
- $11.58 million per person in 2020
- $11.7 million per person in 2021
That amount is scheduled to return to roughly $5 million in 2026. However, that could change with a new administration taking over and the nation being roughly $27 trillion in debt. That means that taking advantage of the current limits could be crucial sooner rather than later.
Those looking to make smaller gifts can currently give anyone $15,000 per year (double for married couples) tax-free to the recipient. You can also pay unlimited medical expenses or college tuition for anyone. Any other gifts count toward the transfer tax exemption amount.
Gifting a house
Giving away money is a much easier decision than property, such as a house. Many parents used to sign over the family home to their kids to protect the property from being used to pay for nursing home care or leaving it vulnerable to other creditors. That is usually a bad idea.
Gifting a home you bought for $50,000 decades ago to a child can create massive capital gains tax obligations if they choose to sell it. If the house is valued at $500,000 when the sale is made, they would have to pay a tax on the gain of $450,000. That can be easily avoided by working with an experienced estate planning and elder law attorney.
If you have enough money to share and want to help your kids now, this is a great time to take advantage of the laws in place. However, if you want to protect assets, such as your house, from a nursing home or Medicaid, that’s a bit more complicated.
In either case, using your assets to help a child can be extremely gratifying at any point. But, it’s advisable to work with a knowledgeable lawyer who can ensure that you make smart decisions and that your money is well-spent.