There was a time when I could give an answer without caveating with some version of “It depends.” Regrettably, that time has passed, but hopefully my answers are more worthwhile when all the fine print following “It depends” spills out.
What does this have to do with giving? Well, a steely-eyed killer asked me recently, if his parents should start giving him and his siblings money and investments that they don’t expect to need. A second part of the question was, “is there any benefit to spending down assets to ‘look poorer’ to Medicare or Medicaid”?
Thinking through this question, there’s a lot of “it depends” to unpack. Let’s start with three categories of complexity surrounding gifting. Each is worth an article by itself, so I’m only going to speed-date these concepts to give an idea of how to start thinking through the issue.
Complexities of Gifting
Taxes are inextricably linked to gifting both to charities and private parties. The reason is that Uncle Sam generally incentivizes gifts to charity and limits transfers of wealth (a.k.a. gifts) to private parties such as family members.
Tax rate now vs. tax rate later—If the gift will be taxable, or perhaps it produces taxable income, do you believe that rates are higher now, or will they be higher later? What method produces the lowest lifetime tax on the gift?
Donor’s tax rate vs. recipient’s tax rate—Which tax rate are you solving for? I.e., if you give an income-producing asset to a family member in a higher tax bracket, did you affect your desired tax bill?
Lifetime Gift Tax Exemption today vs. 2026—Currently, all taxpayers can give $12.06M throughout life, or at death (combined) without owing taxes on the gift(s). This is separate from the annual exclusion of $16K. In 2026, this amount will be cut by about half pending any changes in tax law. The gift and estate tax is under constant pressure and many politicians would like to see the limit closer to $1M. Is it appropriate to give now while the limits are at historical highs?
State Estate and Gift Taxes—Some states have their own thresholds for gift and estate tax. State tax rates can be far less forgiving than federal rates so it’s crucial to factor these into giving plans.
Capital Gains Tax Rates—Income taxes are usually the tax rates that wage earners care about, but when gifting appreciated assets, one must consider capital gains tax rates today and in the future as well to lower the lifetime tax bill.
Charitable Tax Deduction—If you give certain assets to charity, you can deduct them from your income to lower your tax bill. Under current law, many taxpayers are incentivized to “bunch” gifting in alternating years to maximize the tax benefit. Is it possible to integrate charitable gifting into a strategy to lower the lifetime tax bill?
Shadow Taxes—Shadow taxes such as the Medicare IRMAA (Income Related Monthly Adjustment Amount) and Affordable Care Act NIIT (Net Investment Income Tax) don’t pop up until income hits certain thresholds. Who’s shadow taxes are you solving for—yours or the recipients?
Annual Exclusion—In 2022, any taxpayer can give any other human $16,000 without a tax impact. Gifts received are not taxable to the recipient, although income generated from gifts can be. Using the annual exclusion amount as part of a years-long plan can be very effective at achieving gifting and tax goals.
Federal Tax vs. State Tax—Each state can have its own laws about gifts either during lifetime or at death, so will a gift have a state tax impact too? Will the recipient have state tax implications due to income generated by the gift?
Step-up in Basis—This refers to the current law that allows assets to “step-up” their basis to fair market value at death of the owner. E.g., buy a stock at $10, but it’s worth $1,000 at death. Heirs get the basis of $1,000 and don’t have to pay tax on the $990 of gain. Is it worth waiting to achieve step-up in basis at death to complete the gift?
Medicaid 5-Year Claw-back—Again, each state is different, but in general Medicaid looks back 5 years to determine whether a potential Medicaid recipient improperly divested assets to avoid paying for health or long-term care. While it may be appealing to get the government to pick up the tab for healthcare or long-term care, it’s crucial to remember that these programs are for those in poverty. I.e., a Medicaid nursing home is not exactly the Ritz Carlton…
The true reason most of us give away money or assets is fulfillment. We want to feel better knowing that we did good and that we made a positive impact on a cause or person.
Expected value of gifting now vs. gifting later—Will you feel better if you give today? How will you know? Could you give more if you gave later? Are you sure you can live without the gifted asset yet?
Expected value of receiving now vs. receiving later—Will the recipient get more fulfillment from the gift now? Is s/he at risk of being a spendthrift? If you delay giving the gift, will it still have meaningful impact down the road? I.e., 60-year-olds don’t have the same needs as 30-year-olds.
Need for the gift—Does the recipient have a need such as education funding? (Good news—lots of tax efficiencies for this kind of giving!) Medical care (same!) House down payment? Job change opportunity? One-off vacation? Some opportunities are fleeting.
Family dynamics—Will the gift distort family relationships? Will jealousy arise? Do you have to be equitable? If money makes us more of who we already are, what will that do to your recipients?
Future-self options—By giving away assets now, are you limiting your future self’s options? Can that be mitigated with the gifting strategy?
Cognitive decline—Alongside other aspects of aging, will your future self still have the desire or capacity to give if you delay?
The primary reason to hold off on gifting is that there’s almost always a competing use for the money/asset.
Consumption—Is the money needed to support current or future lifestyle? Could it be? How sure are you?
Roth Conversions—One function of a Roth Conversion is that it pre-pays a tax bill for one’s heirs if the money isn’t used during the Roth IRA owner’s lifetime. If a Roth Conversion is pre-paying a tax bill, is it possible that the heirs tax rate might actually be lower? This is leaving the tax man a tip!
Education Funding—As mentioned above, there are no tax effects for paying education costs directly to accredited education institutions. I.e., grandparents can stroke a check directly to the Harvard tuition office and there’s no tax on the gift and it doesn’t count against the annual exclusion. It may impact financial aid, so it’s necessary to weigh this if it’s a factor.
Medical Care Funding–Similar to educational payments, donors can directly pay medical bills without affecting the annual exclusion or creating a taxable gift.
Further Wealth-Building—If you’re proficient at building wealth, perhaps you can do it better than the gift recipient. Holding on to the gift to grow it may feel like a better option than gifting today.
Cleared to Rejoin
As is often the case, when someone asks me the time, I rattle off clock-building instructions. When it comes to giving, there really is a host of factors to consider between taxes, fulfillment, and competing uses. If you’re considering giving, or someone is considering giving to you, theses questions can help you make sure you hit the right target and avoid over-paying the IRS.
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