Margaret A.M. Heine

is the principal counsel at Heine Law Group in Fullerton, California. She is licensed in California and Washington and has authority to practice before the Supreme Court of the United States and the United States Court of International Trade.

Her practice includes estate planning, wills, trusts, and probate as well as business, real estate, and civil litigation. Email: nbylegas@gmail.com or visit company website www.margaretamheine.com.

Planning for Lifetime Gifts

Estate planning is more than planning for death.  Lifetime gifts can make a big difference to children, grandchildren, family members, and ultimately your estate.

Did you know that you can contribute or make IRA’s for your children, your grandchildren, or other family member?  Did you realize that you can set up a college savings program for your family members and turn unused savings into a Roth IRA? How about other lifetime gifts including real estate, boats, cars, stocks?

It is recommended that you speak with your financial advisor or accountant before making any decisions, but this is a basic primer of what you need to know if you are a U.S. resident.  Rules for non-resident donors and non-resident recipients are different, and should be verified with your accountant or CPA.

Gifts to IRAs, Roth IRAs, and 529A college plans are all attractive vehicles to distribute wealth to family members during your lifetime.  There are some very specific rules and general ceiling limits.

In general, Gifts may be made tax free by the donor to a recipient, if the gift is under the annual exclusion rate of $17,000 for 2023.  Each person may give to any number of recipients $17,000 each and neither party would need to report the transaction or pay any taxes on the gift. For example, a married couple may each give a child up to $17,000, for a total of up to $34,000, all of it tax free and non-reportable.  If they have 3 children, they could gift a total of up to $102,000 to the children.  If the children are married, they could also gift up to $17,000 each to the spouse for another up to $34,000.00.  So, it would be possible to gift a married child and their spouse a total of  up to $68,000.00 in any given year.  The gift tax exclusion amount normally changes every year, so, check the gift tax exclusion for the year you give the gift.

If you wanted to gift more than the exclusion amount, you can, up to a lifetime gift exclusion amount of $12,920,000 in 2023.  This exclusion amount typically changes every year. The gift tax will change in 2025, and revert to pre-2018 levels. That means in 2025, the lifetime exclusion will only be $5,000,000.  So, between now and 2025, you can gift $12,920,000 without incurring any gift tax.  Any gift amounts made now in excess of $5,000,000.00 will remain exempt in 2025 and future years.  Obviously in 2025, you would have exhausted your gift tax exclusion at that point, and would then have to pay gift tax on any gifts in excess of the yearly exclusion.

So, if you gifted $50,000 to a child in one year, you would have to file a gift tax return for the excess amount over $17,000.  Your gift tax return would show the excess gift of $33,000.  If you have not used all of your lifetime exclusion, you would apply this $33,000 against your lifetime exclusion and thereby reduce your lifetime exclusion to $12,897,000.

If the donor gives more than $17,000, the annual exclusion, to one person in any year, then a gift tax return, which is informational, would be required to be filed with the IRS.  This form is the IRS form 709.  (See also, IRC Chapter 12, Subtitle B.) The amount over $17,000 would normally be taxable at a tax rate of up to 39%; however, using the lifetime exclusion, the gift will not be taxed until the $12.92 million dollar exclusion is utilized.  The donor pays any gift tax, not the recipient. The tax return may require that you provide documentation regarding value, the transaction, and any unusual aspects of the gift.  Again, you should review with your tax advisor.

You can make gifts to IRAs, Roth IRAs and 529 College Savings Accounts under the gift tax regulations.  If you are making a gift to an IRA or a Roth IRA, the recipient must meet the requirements for the gift—

they must have earned income from wages, salary, tips, commissions,

total deposits cannot exceed the amount of income earned by the recipient nor exceed $6500.00 for the tax year 2023 (limits change every year)

If the recipient is a minor, then the account must be a custodial account with a guardian controlling the account until the recipient comes of age pursuant to their state law

The recipient is responsible to pay the taxes payable on the gains at withdrawal on an

IRA.  The money cannot be withdrawn until age 59 ½ without a 10% penalty on an IRA.

On a Roth IRA, the recipient will not be taxed on the gain on the money when withdrawn as long as it is withdrawn after age 59 ½.  So, the gain is not taxed upon withdrawal.

On a 529 College Savings Plan, the money grows tax free, and no taxes are payable if the money is withdrawn for bonafide, permissible, educational payments like tuition, mandatory expenses, some room and board expenses.  The gift tax is exempt if the contribution is under the gift tax exclusion of $17,000 (for 2023); however, a lump sum payment equivalent to 5 years of gifts may be made into the account, so, $85,000, provided no further gifts are made by that person for 5 years.  This allows a larger amount to be invested for growth at an earlier time.  In California there is a maximum size for a 529 Plan, and that amount is set to $529,000 total in the account.  The maximum amount varies by state.  Be mindful that there is no Federal tax deduction or credit for 529 contributions.  The only federal exclusion is as a gift.

A few states will allow tax credits for gifts to plans in other states.  These states are Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.  Otherwise, you are restricted to tax credit only for contributions to plans in your state of residence.

There is also a 529 plan which allows for gifts for K-12 school expenses.  This account permits gifts to pay for private school education while in grade and high school.  A limit of $10,000 may be withdrawn in any year.  For college savings, there is no such limitation.

If you withdraw from any 529 for any other non-approved expenses, the withdrawal is treated as income on any gains in the withdrawal, and a 10% penalty for an unauthorized withdrawal.

In a real change, The SECURE 2.0 Act passed in December 2022 and going into effect January 1, 2024, permits any excess funds in 529 accounts, up to $35,000 to be converted or added to a ROTH IRA account for the person, provided that:

The 529 account had been opened for at least 15 years;

It might not be a lump sum roll over, but could be required to be taken over several years

A plus to a 529 account is that if there are excess funds in the 529 account and the name

recipient has finished school, then the account can be renamed into someone else’s name for their education expenses.

These are the most basic primary rules for gifting to IRAs, Roth IRAs, and 529 Plans.  They can be a great tool to distribute wealth while you are still alive for the future benefit of the recipient, while providing a tax free transfer of wealth in those circumstances.  This is especially true when the recipient is starting out in their career and may not have the excess income to fund their IRAs or Roth IRAs.  It is also a great way to have money grow for education expenses, and can be started at any time to benefit your recipient.  Please talk to your financial advisor and attorney about these alternatives to see what fits best into your estate planning goals.