After you are gone you want your loved ones, particularly your children, to be able to use and enjoy the assets you leave behind.

Did you know that gifting assets is not as straightforward as you may think, and you need to be strategic when leaving money, property, or anything else you want designated for a particular loved one?

 

WHAT ARE COMMON GIFTING MISTAKES?

 

Failing to name Beneficiaries

You have the option on life insurance policies and retirement accounts to name a beneficiary who the asset will pass on to after your death. If you fail to name a beneficiary, the asset is almost certain to go through probate after your death, a costly and time-consuming process.

Your life insurance policy could end up being taxed more than you anticipated if you don’t name a beneficiary, so always name beneficiaries, and make sure to name a contingent beneficiary as well. Naming a contingent beneficiary is someone who will receive the life insurance funds if your intended beneficiary dies before you, or right after you, it will be the same as if you didn’t name a beneficiary at all.

It is also important to keep your beneficiaries up to date, so periodically reviewing your policies will ensure that you have the right person named—this is especially true after a death in the family or a divorce.

The process for naming a beneficiary is usually simple and straightforward, so double check to make sure you have one named!

 

Failing to take Advantage of an Asset that
qualifies for “Stepped Up Basis”

Maybe you would like to give your children or other loved ones your stocks before you die. If they have appreciated, the recipient will end up paying capital gains taxes on the profits, which could be significant.

Instead of gifting highly appreciated assets while you are alive if you save them to be passed on after death your recipient will receive a step-up basis to the current value of the asset and in many instances, taxes can be eliminated.

Stocks that have a high appreciation should be saved to be passed on after death and ensure that your loved ones get the maximum benefit.

 

Giving too Much

If you are eager to pass on assets to your children, you may want to give them before your death. While sometimes this makes sense, you need to have enough money to live comfortably, especially after retirement.

If you don’t have new income being generated, will you be able to handle future medical costs, assisted living costs, and other unforeseen expenses?

You might give too much in the form of cash, but you also might tie too much money up in trusts and investments, not leaving enough to have a comfortable financial future.

Consider your gifting options to help your children while you are still alive, while still leaving enough that you will be comfortable as well.

 

Naming your Child as a co-owner of an account

It is a common occurrence to want to give a trusted child access to your bank account to help you manage your finances as you get older. However, if you name your child as co-owner on the account, you may end up with some undesirable consequences.

While this arrangement allows your child to access your accounts, they end up being the co-owner of that asset, and you are in effect gifting them that asset. That means that gift tax regulations come into play, and they could end up having to pay.

Another problem with your child as co-owner is that half of the account becomes subject to any claims by creditors, bankruptcies, or lawsuits against that child.

The account could even become a part of any divorce proceedings your child goes through.

Instead of naming your child as a co-owner, consider a durable power of attorney to give them access to manage your affairs without being the owner of them.

If your child becomes a co-owner, they also will inherit the entire balance of the account upon your death, which might not be your intent.

 

Leaving Assets to a Minor Child

If your assets, such as life insurance policies or property, are directly transferred to your minor children, the money will transfer to them when they turn 18, often in full. This is a large responsibility for a young adult, and many studies show that an inheritance is spent within 18 months of receiving it.

You want any inheritance to go towards your child’s education and other important expenses, and not just be spent on fleeting things that they will regret. You also need to think about potential bad spending habits of your children, future divorces, or future creditors or lawsuits. There are ways to structure your gifting so that you protect your children from making rash decisions with the money you want to leave them.

 

Gifting Assets to an Individual with Special Needs

If you have a special needs child, you want to do everything you can to ensure that they are taken care of financially in the event of your death.

However, gifting them money can sometimes disqualify them from benefits such as Supplemental Security Income (SSI) or medical assistance due to a disability.

These government benefits can be income and asset dependent, and if they inherit a large sum of money, they may need to spend it down to then re-apply for the benefits. This can be a stressful process for your child and can be a waste of your estate.

There are ways to create special needs trusts that can hold assets for a special needs individual without jeopardizing their benefits.

 

Not Knowing About the Gift Tax

It seems like just being able to give your children or loved ones the money you want them to have, right? Unfortunately, if you give them too much during your lifetime it can be subject to the federal gift tax. If you give more than $16,000 annually to your children, they could end up paying tax on it, and this includes gifting property.

It is the value of the property or assets that you transfer that will count toward the value. There are ways to gift money and assets to your children to avoid paying gift taxes, and meeting with a trusted estate planner is crucial to making the right decisions.

 

Not Knowing About the “Kiddie Tax”

The so-called “kiddie tax” was created to prevent parents from sheltering cash and assets under their minor children’s names to avoid taxation. If your child receives unearned income (gifts) up to $1,000 they will be taxed at the kid’s bracket, but once the value reaches $2,000, they will be taxed at the parent’s rate. You can’t just give money to your minor children completely tax-free, but you can take steps to avoid paying the kiddie tax.

 

Not Having an Estate Plan

Probably the biggest mistake you can make when gifting money to your children or loved ones is to have no estate plan at all.

Thinking about what will happen after you die is not a fun subject, but if you do no planning you will end up letting someone else (the government) decide how to allocate your assets. Your family members might need to go to through probate to have access to assets, and this can be a time consuming and expensive procedure.  Your assets may not be distributed how you want and to who you want – especially if the gift you are trying to make is to a non family member.

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There are many options available when considering estate planning, including have a will, setting up a trust, or gifting to your loved ones while you are still alive. How do you know what options will be best for you and your unique financial situation? That is where a Vertical Estate Planning , LLC comes in.

We are here to help you navigate the complex waters of estate planning. We can help with estate planning at any stage of life, but we are especially passionate about estate planning for seniors.

Whether you don’t have any estate planning done, or you would like us to help you refine your current plan, we can advise you on how to maximize your gifting to family members and loved ones.