In this video, the advisors discuss strategies for gifting to children, especially when they are underage. They emphasize the importance of utilizing the annual gift tax exemption, which is currently $16,000 per person. By making annual tax-free gifts to their children, individuals can reduce their potential estate tax liability in the future, particularly with the looming reduction in the lifetime estate exemption.
For children over 18, various mechanisms such as helping them fund Roth IRAs, max out 401(k)s, or assist with down payments on a home can be effective. However, it’s essential to strike a balance to ensure that children remain motivated in their careers.
For children under 18, the advisors recommend considering an irrevocable trust as a means of gifting while maintaining control and protecting against financial immaturity. Irrevocable trusts, particularly those funded with life insurance, offer a structured approach to wealth transfer while minimizing tax implications.
The key takeaway is that proactive gifting strategies today can save individuals significant tax costs down the road, especially if they anticipate their estates exceeding the lifetime exemption threshold.
In this video, we’re going to discuss some strategies for gifting to your children when they’re underage. So, Matt, currently the lifetime estate exemption is a little bit over 12 million, but that is scheduled to sunset to about 6 million in 2026.
So there’s a lot of people that might not have an estate tax problem now, but could in a couple years. So what are some strategies that we’re seeing with our clients to get money out of their estate now to avoid this potential estate tax down the road?
Yeah, great question. So any person has the lifetime exemption, as you mentioned, but also has an annual exemption that is currently 16,000 per person. Just using an example, if a married couple has two kids, the wife could give 16,000 to child 116 thousand to child two, and the husband could give 16 and 16 to child one and child two as well.
So in that example, there’s a total of 64,000 per year that could be transferred if that 64,000 was above that exemption upon passing, or if an analysis shows that they’ll be well above every 64,000 that’s transferred now, which is tax free.
Not reportable would save $28,480 in taxes between a 40% federal rate and a four and a half percent Pennsylvania inheritance tax rate that would generate upon passing. So that’s 28,480 per year that can be saved for someone that’s expected to be above the exemption just by transferring the wealth now.
So if your kids are above the age of 18 and are working mechanisms such as helping them fund Roth IRAs, helping them max out their 401 KS, helping them with a down payment on house, there’s many structural avenues to gift them.
And the one important thing here is that we do recommend to do lifetime gifting to see how your kids react to it, make sure they stay motivated in their careers. There’s such a thing as helping so much that you end up hurting the person you’re trying to helping.
So we want to balance enabling their careers, not. Disabling their careers. From a lack of motivation. So that’s a strong consideration. And then for kids under the age of 18, a trust mechanism. An irrevocable trust mechanism should be considered because you don’t want to gift money outright to your kids.
There’s financial aid, there’s the maturity level if the kids have access to that much money at a young age. So if you place the money in an irrevocable trust, you choose a trustee to overlook that for your children and you decide on the terms of that trust.
Now, just like gifting to somebody, that money can’t be accessed back once it’s gifted, so it’s out of your estate. But this would be a mechanism. If your kids are under the age of 18 or under the age that you feel like they may be mature or responsible to handle the money, then a trust should be considered.
Using insurance inside of a trust, as insurance is naturally tax free as irrevocable trusts have their own tax rates which escalate up to the highest marginal tax rate rather quickly. So outright gifting if your kids are of age, gifting into an irrevocable trust can be a strategy.
Again, this is only recommended for clients that have a want or they view it as a need in their financial plan for wealth. Transfer to children, whether their kids are under or over age 18 are mechanisms to receive those gifts which are ultimately, if you’re expected to be above that lifetime exemption long term, will save you thousands of dollars of taxes by taking the disciplined approach today versus a wait and see approach in the future.
Thanks for watching and look forward to catching you in the next video.