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Gifting money with legacy gifts

Planning for your child’s financial future involves a number of key decisions. Your plans can include saving money for education, creating smart investment plans or making sure they’re covered by life insurance in case something happens to you unexpectedly.

Having a will is an important first step in any future planning for your loved ones. And we’ve partnered with FreeWill to offer a fast and easy way to get your will created today.

You’ll also want to understand what’s involved in planned monetary gifts to help you determine if this is a type of inheritance you want to leave your family.

Planned giving definition

Planned giving, also known as legacy giving, can take different forms. Usually it refers to leaving money to a nonprofit or charity in the event of your death. But it’s also a way of providing your children a gift of money or property.

When a legacy gift is made to your children, it's commonly referred to as an advancement. An advancement is a specific kind of gift that the giver intends the value of the gift be deducted from that person's inheritance after the giver's death. To make sure that your legacy gift to a child qualifies as an advancement, it’s wise to consult with an estate planning attorney.

Tax implications with legacy gifts

Gifting money involves careful planning to minimize the impact of gift taxes levied on your assets.

The federal government assesses a gift tax (40% rate) on cumulative taxable gifts that exceed $11.7 million in value (2021). Today, very few people actually pay the federal gift tax. However, under current law, in 2026 the federal government will assess a gift tax (40% rate) on cumulative taxable gifts that exceed $5 million (indexed for inflation). In a few years, many more people may face exposure to the gift tax.

The giver is generally responsible for paying the gift tax. If annual gifts to a particular individual (recipient) exceed $15,000, the giver will likely be required to file a gift tax return and will start to reduce the amount of his/her remaining lifetime tax-free gifts.

Today's tax codes and laws make it simple to make gifts of money to children or other family members. Some of the bigger issues that you should not overlook in the planning process are the effect your choices will have on your family's interactions and what impact you want them to have.

For example, if one of your children has a large amount of debt, that person could be at risk of losing the gifted money to creditors. You should objectively assess the situation and make decisions with help from a professional. This can provide the peace of mind that you're doing the right thing for your money and your family.

Set up a legacy by gifting property within a family

Because there are many questions, implications and tax rules involved in creating a legacy gift, it’s important to work with an experienced professional. That person might be of the opinion that the gift can be made outright to the individual or may suggest that you make the gift in trust for that individual.

Any donation of money or property requires careful consideration, and making legacy gifts to children is no exception. Among the details you'll want to review with a financial expert are how much you're able to give, how the gifts should be divided, and when the gifts should be made. And you'll want to review with a legal expert whether you want your gift to qualify as an advancement, whether the gift should be made outright or in trust, and what the gift tax implications of the gift are.

If you're interested in making a legacy gift, it's important to gather all of your relevant documents and accounts and assess your finances. You can download our personal info organizer to help you get started. Then meet with a financial planner to review your options. Doing so can make planning your future simpler and ensure that your family is taken care of.

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[1]  “What is Planned Giving?,” plannedgiving.com/what-is-planned-giving (accessed Dec. 2, 2020).

[2]  “Estate Tax,” irs.gov/businesses/small-businesses-self-employed/estate-tax (accessed Dec. 2, 2020).

[3]  “17 States With Estate or Inheritance Taxes,” aarp.org/money/taxes/info-2020/states-with-estate-inheritance-taxes.html (Oct. 5, 2020).