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Share Your Money Before You Die

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Now that the long-debated estate tax rules have finally been settled, let's get real: Despite all the hoopla raised, most people probably would never be impacted whether the lifetime estate tax threshold had stayed at $5.12 million or reverted to $1 million. In the end, it actually went up a bit to $5.25 million for 2013.

Even if your estate will only be a fraction of that amount, it still pays to have a plan for distributing your assets. If your finances are in good shape, there's no reason not to start sharing the wealth while you're still around to enjoy helping others. It also doesn't hurt that you can reap significant tax advantages by distributing a portion of your assets now.

Before you start doling out cash, however, make sure you are on track to fund your own retirement, have adequate health insurance, can pay off your mortgage and are otherwise debt-free. You wouldn't want to deplete your resources and then become a financial burden on others.

If you can check all those boxes, consider these options:

Avoid the gift tax. You can give cash or property worth up to $14,000 per year, per individual, before you'll trigger the federal gift tax. (Married couples filing jointly can give $28,000 per recipient.) You must file IRS Form 709 (Gift Tax Return) for any gifts that exceed these amounts.

This doesn't necessarily mean you'll ever have to pay a gift tax, however. You're allowed to bestow up to $5.25 million in gifts during your lifetime above and beyond the annual $14,000 excluded amounts before the gift tax kicks in -- which for most of us means never. Also not counted toward the lifetime exclusion are:
  • Gifts to your spouse
  • Direct payments you make for someone else's tuition or medical expenses
  • Qualified charitable contributions
  • Gifts to qualified political organizations, such as political parties, election campaign committees and political action committees (PACs)

Read IRS Publication 950 for more details. Note: Some people mistakenly believe that the recipient must pay tax on the gifted amount -- that's not the case.

Pay for education. If college is still far off for your children, grandchildren or others, you might consider funding a 529 State Qualified Tuition Plan for them. Any interest the account earns is not subject to federal (and in most cases, state) income tax; plus, many states offer tax deductions for contributions made to their own 529 Plans. And don't worry: If one child decides not to attend college, you can always transfer the account balance to another without penalty. FinAid.org has an excellent guide that explains how 529 Plans work.

Roth IRAs for kids. If your minor children or grandchildren earn income (allowances and gifts don't count), you may fund a Roth IRA on their behalf. You can contribute up to the lesser of $5,500 or the amount of their taxable earnings for the year. Your contributions are made on an after-tax basis but the earnings grow, tax-free, until the account is tapped at retirement.

For young people, these earnings can build tremendously over time. For example, say you made a one-time $1,000 Roth contribution for your 16-year-old granddaughter. If it earned an average of six percent interest, that one-time contribution would be worth nearly $20,000 -- tax-free -- when she reaches age 66. If you (or she) contributed just $50 a month going forward, it would grow to almost $210,000 by age 66.

Fund someone's benefits. Many people cannot afford health insurance and so forego coverage, putting themselves just one serious illness or accident away from financial disaster. Many also cannot afford to fully fund their 401(k) plan or IRA. Consider applying your tax-exempt gifts mentioned above to help loved ones pay for these critical benefits. You'll not help protect them from catastrophe, but also greatly increase their long-term financial self-sufficiency.

Charitable contributions.
If you're planning to leave money or property to charities in your will, consider beginning to share those assets now, if you can afford to. You'll be able to enjoy watching your contributions at work -- and be able to deduct them from your income taxes. Read IRS Publication 526 for details.

Here's another good charitable contribution idea: With few exceptions, people over age 70 ½ who have a traditional IRA, regular or Roth 401(k) plan or other tax-deferred retirement plan must take annual required minimum distributions (RMDs) and pay any income taxes owed on the amount. Failure to do so by December 31 each year can result in severe financial penalties.

One approach many seniors take is to transfer up to $100,000 directly from their IRA to an IRS-approved charity. Although the RMD itself isn't tax-deductible, it won't be included in your taxable income, which could reduce taxes on your Social Security benefits and make you eligible for tax breaks tied to Adjusted Gross Income (AGI). It also lowers your overall IRA balance, thereby reducing the size of future RMDs.

Note: Such transfers are not allowed from 401(k) plans; however, it is possible to convert your 401(k) balance into a traditional or Roth IRA. See my previous blog, Deadline Approaches for Mandatory IRA Withdrawals, for more details on RMDs.

Before taking any of these actions, consult your financial advisor to make sure your own bases are covered. If you don't have an advisor, search the Financial Planning Association, the National Association of Personal Financial Advisors or the Certified Financial Planner Board of Standards.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.