They are always so happy when they make the terrible mistake. I am talking about people who win the lottery or suddenly come into money. The quotes are something like “we gave all of it to the kids” or “we bought everybody a house” I read about one Tesla investor who announced in an internationally distributed newspaper that he bought houses and Tesla cars for every member of the family. He also paid off all of their debts. Oops! I’m pretty sure that IRS agents read newspapers.
These are wonderful sentiments and I love that so many well-meaning and kind people conduct family meetings. However, rich people can’t just give their money away without serious tax consequences. Please don’t do it on the pages of The Wall Street Journal or The New York Times. Gifting is a very important and powerful tool for preserving assets after death, but it must be done correctly.
This year, the amount that can be given to as many individuals as desired is $16,000. Paying off mortgages, buying houses, establishing joint ownership, buying cars, or any number of transactions can require the filing of a gift tax return. There are exceptions to the $16,000 limit. You can pay tuition directly to a school or pay healthcare expenses directly to a provider. You can use five years of exclusions to fund a 529 college plan. This is a great way to get a lot of money working for a child or grandchild right away, rather than making an annual gift.
If you win the lottery or come into sudden wealth in any way, you may want to make large taxable gifts as soon as is possible. This year the estate and gift exemption is $12,060,000.00 for an individual and $24,120,000.00 for couples. Unless Congress changes the law, that number drops to $5,000,000.00 in 2025. The amount is indexed for inflation, so a couple will probably be able to pass about $12,000,000.00 without estate or gift taxes. Amounts over that may be taxed at 40% - state taxes could make it higher. Many wealthy people are giving the money away now and filing a return in order to preserve today's giant exemption.
You can give all of your money to your spouse tax-free, but you may lose your own valuable exemption and increase the amount to be taxed later, which is a terrible strategy. Good planning can turn before-tax money into after-tax money upon the first death. Income can still go to the surviving spouse, but further growth will not be taxed upon the death of the second spouse.
The IRS is counting upon people to make these mistakes. The well-meaning who make gifts to their children might just be gifting their children their own estate-tax problem. I have not scratched the surface of what needs to be done for those who wish to be good stewards of their wealth. Tremendous opportunities exist to fund charitable causes rather than Uncle Sam and/or states that have their own death taxes. Many people may believe that “we gave all of it to the kids” when they really gave a lot of their wealth to the government. That may be less happy.