Gifting planning for upper 60s widowed.

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runner9
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Gifting planning for upper 60s widowed.

Post by runner9 »

One of my parents died in April. The surviving parent is considering wanting to gift some money to 2 children. I’m trying to help with some guidance on how different amount would affect the future, what accounts any gifts would come out of, etc.

Surviving parent is upper 60s, healthy and active. 2 children are early 30s, both married, 1 with 1 child the other with none. (no new children coming)

Annual net income is about 55K and a rough/best estimate of annual expenses is 54K which includes some travel, home improvements etc.

LTC insurance is in place to kick in after a 90 day elimination period and lasting up to 4 years.

When surviving parent passes away, hopefully not for a good 20 years, portfolio and other assets will be split 50/50 between the 2 children.

My surviving parent’s portfolio, all at Vanguard in basically a slice and dice portfolio. (skipping details, looking for guidance on the gifting question) All accounts were assumed and combined, with a full step up of cost basis in April.

Total portfolio: 1.51 million.

Traditional IRA: 1.12 million, 75% of total
43% bonds, 58% stocks

Roth IRA: 3K, 0.2% of total
All stock

Taxable 380K, 25% of total
77% bond, 13% stock, 9% cash
The taxable funds all pay monthly dividends into Ohio Tax-Exempt Money Market (VOHXX)
Previous records show this money was then sometimes reinvested or sometimes withdrawn, I’m guessing without taxes? This amounts to roughly $18-$20K a year.

Surviving parent first mentioned the idea of gifting. I guess it was discussed when both were living but decided against. Us kids are older, established, surviving parent is now wanting to consider. Surviving parent believes it’s more money than s/he will ever need, might as well share some now.

At one point mentioned considering gifting the .5 part of 1.5 million, is now thinking more about 14K per child or child and spouse per year, or some years.

So questions to start:

What should be considered/how to decide when deciding how much to give?

Whether surviving parent wants to give $1 or 1 with 5 zeros on it, what accounts, what order of accounts would be best and why?

As always, thank you for the advice!
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Re: Gifting planning for upper 60s widowed.

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (gifting).
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Re: Gifting planning for upper 60s widowed.

Post by Gill »

Does the annual income include income or withdrawals from the portfolio?
Gill
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Re: Gifting planning for upper 60s widowed.

Post by Calm Man »

She thinks she has a lot. You say she is healthy though and in her upper 60s. She could live 35 years and even if in good shape will have a lot of costs probably the last 10-15. I'd be real careful about what she gives away. And I would strongly suggest she not give anything to spouses.
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Re: Gifting planning for upper 60s widowed.

Post by JW-Retired »

It would help to know what this "annual net income" is from?
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Annual income does not include anything from the portfolio.

Income is social security and ohio teachers pension (STRS).

CORRECTION: income is 51% STRS (Ohio teacher pension), 37% pension from a Fortune 500 company, 12% social security.
Last edited by runner9 on Sat Sep 13, 2014 3:01 pm, edited 1 time in total.
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Re: Gifting planning for upper 60s widowed.

Post by Gill »

I wouldn't feel she's in a position to make other than fairly small gifts to the two children, maybe in the five to ten thousand range. She has a long time to live and too many possible expenses.
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Re: Gifting planning for upper 60s widowed.

Post by Steelersfan »

Gill wrote:I wouldn't feel she's in a position to make other than fairly small gifts to the two children, maybe in the five to ten thousand range. She has a long time to live and too many possible expenses.
Gill
I agree.

As time (and life) goes on, she may be able to increase the amount.
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Re: Gifting planning for upper 60s widowed.

Post by MN Finance »

It's obviously a simple question. Can mom cover all of her future expected expenses in all market conditions with a portfolio size = today - future gifts. I don't think we can answer it given the data, but I'm sure you could (btw, of course how the portfolio is invested indeed is a major factor in her success/failure, and therefore the ability to gift.) It's the same question as if the OPost was from mom herself asking if she'll be okay, but with a stating portfolio value = today - gifts. As to "how", she just writes you a check, if needed free up cash.
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Re: Gifting planning for upper 60s widowed.

Post by Spencer »

From an estate planning perspective, she is well below the ~$5mm estate tax exemption, so estate tax avoidance is really not a factor. Above the exemption is where gifting strategies come into play.

With that said, if she does want to gift, cash is best within a simple gifting strategy. When gifting assets with low cost basis, the basis transfers over to the recipient. Additionally, you cannot pass on embedded losses.
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Re: Gifting planning for upper 60s widowed.

Post by harmony »

The widowed parent is fairly young yet. Over 20 or more years, that large traditional IRA could be slowly rolled over to a Roth IRA in years when there is any space left in the widowed parent's current tax bracket. (Since filing status is now single, this might be a very small space, if any, depending on the bracket, amount of pension income, and size of Social Security.) This could begin to lower the tax bill for heirs who (if they are couples with high or dual incomes) may be in a higher tax bracket than the parent. If current laws hold, Roth RMDs could be stretched out to heirs over more years and will not be taxable to them, as the traditional IRA would be. An inherited Roth would be a postponed bigger gift, but would not increase the risk of the parent running out of funds. The TIRA taxes must be paid whether by the parent or the heirs. It seems parent has non-IRA funds to pay off these taxes.

Perhaps this surviving parent had help from the partner, but without that partner, and as health deteriorates and as years go by; he/she may need to pay for more services than the two of them, in better health in earlier years ever had to pay. If children help the aging parent, one adult child may contribute more assistance than the other. It might help to hang onto funds to pay for this.

I am concerned about the LTC policy. It pays 4 years which is longer than most. I talked with a classmate recently whose mother survived 7 years in a nursing home with Alzheimer's Disease. If your parent were to need more than 4 years LTC, he/she could use not-yet-taxed accounts to pay for care; the earnings may count as a medical expense deduction on Schedule A. So if there is still some taxable income left, it could be used for that. On the other hand, if she/he were to gift it now, taxes would need to be paid.

Estate taxes used to be an issue for more couples, but the new higher limit isn't likely to be reached by the remaining parent. They may have talked of gifting before the first passed; but was that before these limits were increased? It would help to better understand why they had once considered gifting. This death was recent . . . big decisions should be postponed for a while yet.
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Re: Gifting planning for upper 60s widowed.

Post by Christine_NM »

There seems to be a point at which a seemingly more-than-needed portfolio starts to burn a hole in a widow's pocket. After Dad died, Mom started gifting to me back when $10k meant something. Her sisters had gifted to her after their mother died.

I'm inclined to give more each year to charity, not having children of my own. But I've found that it helps to have a will where charities (and children if you have them) are well taken care of. That may be enough limit current giving to tolerable amounts.

As to what accounts, does it matter? This is just another personal budget item. I'd be more concerned about the amount of the gifts being unsustainable or trying to give to too many relatives than which account the money comes from.
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Re: Gifting planning for upper 60s widowed.

Post by Gnirk »

If your mom is in her 60's, I don't think she should be gifting large amounts at this point. First of all, it looks like her expenses = income, right now. Does her pension have an automatic COLA? Is it locked in, or can the legislature remove the COLA if it so desires?

It's great that she has LTCI, but believe me, she may need more than 4 years of care, and it depends what type of policy she has and how much it actually will pay, and under what conditions. LTCI policies differ greatly. And please believe me when I say that if she should develop dementia, she could need LTC for much longer than four years.

I'll share my personal experience with my mom, who was widowed at 63, and is now 89:

My mom had a LTC policy, that paid a flat $143 per day by the time it was needed, with a 4-year time frame. That's enough to pay a little more than HALF of the costs of a nursing home in our area. She started having memory problems 11 years ago, and has been receiving Long Term Care for the past 7 years. Which means she has been paying the difference between the LTCI and the actual costs for 4 years, plus the full costs for the other 3 years, and it is on-going. I am so grateful that she was frugal, lived below her means, and saved aggressively, because she has the funds to pay for her care.

In my opinion, you (she) need to plan for the worst case scenario, long term, and preserve her assets for that worst case scenario. In my opinion, IF she decides to gift, it should be only to her children, not the spouses or grandchild. And a one-time gift only, not on-going.The maximum this year is $14,000 and if she decides to gift, it should be taken from cash reserves.
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Re: Gifting planning for upper 60s widowed.

Post by boomergeneration »

Just want to point out, that while the fed estate exemption is 5 million, your state might start taxing at a much lower level. Here in WA state it starts at 2 million. In some states it starts a lot lower. That may come into play at some point.

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Re: Gifting planning for upper 60s widowed.

Post by dolphinsaremammals »

I'm sorry for your loss.

As others have said, I would not do this. Your parent is young enough so that this would jeopardize her? him? self financially.

Also, big decisions should not be made in the year after a spouse passes away.

After a year, she or he can consider smaller gifts from time to time that do not imperil her or his financial security.
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Re: Gifting planning for upper 60s widowed.

Post by MN Finance »

I don't understand why estate taxes are mentioned at all since it's irrelevant to the proposed question. Second, I don't understand how anyone can opine that this is either a good or bad idea without providing some data/calculations. Gut feeling is no way make these decisions. As I've said, it's not a difficult answer, but does require that the OP run projections.
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Re: Gifting planning for upper 60s widowed.

Post by dbCooperAir »

In my little simple mind, moms OP is pushing 70, has enough income from her SS and Pension. Last time I checked SS has a COLA, not sure about the teacher pension but around this neck of the woods they do (will want to look into this). Also has some LTC to boot.

I'm going to take the other side of the fence on this one, using some round numbers, she has $1.5 and wants to gift $30,000/year (again round numbers). That works out to about a 2% WR.

If I was her and it made me happy I would start gifting it in a hart beat, you bet I would. I'm not touching it, what am saving it for, just incase the Nursing Home wants it, forget that. I'm not saying give it all away set some type of floor and spoil some kids/grand kids.

I'm not sure if the OP said mom owned a home, that could buy a few years in the nursing home after the 4 years of insurance runs out.

As others have said be careful run some projections but if this is what makes mom happy make it so, my off the cuff any thinking between $10K - $30K looks sane to me.

In some states she would already be over the amount that is sheltered from estate tax, Minnesota comes to mind at about 1 million I think.
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Thank you for all the responses. Please keep them coming!

CORRECTION: income is 51% STRS (Ohio teacher pension), 37% pension from a Fortune 500 company, 12% social security.

My surviving parent owns a house outright.

Pension has a 2% COLA built in.

Subject to change, Ohio repealed it's estate tax Jan. 1, 2013.

For those who suggest gifting some amount would be ok, suggestions on what account(s) to withdrawal from?
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Re: Gifting planning for upper 60s widowed.

Post by Spencer »

runner9 wrote:Thank you for all the responses. Please keep them coming!

CORRECTION: income is 51% STRS (Ohio teacher pension), 37% pension from a Fortune 500 company, 12% social security.

My surviving parent owns a house outright.

Pension has a 2% COLA built in.

Subject to change, Ohio repealed it's estate tax Jan. 1, 2013.

For those who suggest gifting some amount would be ok, suggestions on what account(s) to withdrawal from?
Cash from the taxable account.

Generally you want to keep assets within retirement accounts as long as possible. Additionally, as I mentioned before, if you gift appreciated taxable assets, the basis follows to the recipient, which will be a negative compared to appreciated assets receiving a step up in basis after death.
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Re: Gifting planning for upper 60s widowed.

Post by adam1712 »

IMO, the big thing to be thinking about is the required minimum distributions (RMD) from the large Traditional IRA at age 70 1/2 that it appears won't be needed for current expenses. There should be no need to gift from currently held accounts. The parent should be able to gift from cash flow from SS, pension, and RMDs.

I think some of the advice is overly conservative and gifting might not be a bad idea rather than investing the RMDs in taxable. A lot comes down to the chlidrens' tax and financial situation. If it would help them pay down debt or max retirement contributions it could be a good idea. If it's just going to be invested, keeping it with the parent to get the stepped-up basis probably makes more sense.

Has the parent thought about or already planning to do any Roth conversions? That's probably the bigger issue to decide on now versus gifting.
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

My surviving parent has pretty much decided to gift $14K each to 2 children (28K) one time only, at least for now.

These will most likely come from a taxable account, Ohio Tax-Exempt Money Market (VOHXX) which currently has $35K in it.

We talked to a Flagship rep today who was pushing for an "in kind" transfer over writing 2 checks, each for 14K. He stated that there needs to be a "paper trail" for the IRS and transferring "in kind" would be better for a paper trail then writing checks.

I don't understand. If under/at the $14K limit what needs to be reported? We talked with him for about 45 minutes and this was the only point I was left confused on.

Thanks again for the previous discussion on if gifting was ok, how much etc.

Let's say it's been decided to write 2 checks, for $14K each and give 1 check to each child. What needs to happen come tax time?

Thanks!
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Re: Gifting planning for upper 60s widowed.

Post by dbCooperAir »

runner9 wrote: I don't understand. If under/at the $14K limit what needs to be reported? We talked with him for about 45 minutes and this was the only point I was left confused on.

Thanks again for the previous discussion on if gifting was ok, how much etc.

Let's say it's been decided to write 2 checks, for $14K each and give 1 check to each child. What needs to happen come tax time?
From my understanding nothing in your case would need to be done.
http://www.irs.gov/pub/irs-pdf/i709.pdf
Take a look at "Who Must File" on page 1.
Who Must File
In general. If you are a citizen or resident
of the United States, you must file a gift tax
return (whether or not any tax is ultimately
due) in the following situations.

If you gave gifts to someone in 2013
totalling more than $14,000 (other than to
your spouse), you probably must file Form
709. But see Transfers Not Subject to Gift
Tax and Gifts to Spouse, later, for more
information on specific gifts that are not
taxable.

Certain gifts, called future interests, are
not subject to the $14,000 annual
exclusion and you must file Form 709
even if the gift was under $14,000. See
Annual Exclusion, later........
See the link for the rest of the "Who Must File" verbiage but I think you fall under the first one.

I would not mess with a transfer in kind unless it was easier for some reason.
Who does not need to file.

If you meet
all of the following requirements, you are
not required to file Form 709:

You made no gifts during the year to
your spouse,

You did not give more than $14,000 to
any one donee, and

All the gifts you made were of present
interests.
Unless the cash is going to something like a trust for sometime in the future I don't see it required as the gift were of present interest.

I'm no tax guy btw, so reading up on the IRS regs is a good thing.
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Re: Gifting planning for upper 60s widowed.

Post by LadyGeek »

runner9 wrote:These will most likely come from a taxable account, Ohio Tax-Exempt Money Market (VOHXX) which currently has $35K in it.

We talked to a Flagship rep today who was pushing for an "in kind" transfer over writing 2 checks, each for 14K. He stated that there needs to be a "paper trail" for the IRS and transferring "in kind" would be better for a paper trail then writing checks.

I don't understand. If under/at the $14K limit what needs to be reported? We talked with him for about 45 minutes and this was the only point I was left confused on.
Here's the IRS guidelines: Frequently Asked Questions on Gift Taxes
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

Gifts that are not more than the annual exclusion for the calendar year.
Tuition or medical expenses you pay for someone (the educational and medical exclusions).
Gifts to your spouse.
Gifts to a political organization for its use.
...
How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion remains $14,000 in 2014.
Are the gifting funds from the estate of your deceased parent? If so, I don't know the rules on that.

If the gifting funds are from your surviving parent, meaning his/her own account to do as desired, then I'd say you need to do nothing in terms of reporting. If someone wants a "paper trail," then ACH the funds into a bank account and write a check. The deposited check images will be available online at the bank.

(Disclaimer: I'm not an expert, but this is now I read the IRS regulations.)
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Thanks.

We talked about getting a checkbook for the Ohio Tax-Exempt Money Market Fund in the Taxable Account. The paperwork to get that checkbook set up was created today.

This would be to gift $28K out of that account which is solely in my surviving parent's name.

There will certainly be a tax return filed, as there is other income.

Having read the Form 709 instructions (http://www.irs.gov/pub/irs-pdf/i709.pdf) I still don't understand. The withdrawal from taxable will be reported on my surviving parent's tax return for that reason regardless of if it's gifted or how it's gifted, is my understanding but I don't get how the actual gifting of it matters.
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Re: Gifting planning for upper 60s widowed.

Post by dbCooperAir »

runner9 wrote:Having read the Form 709 instructions (http://www.irs.gov/pub/irs-pdf/i709.pdf) I still don't understand. The withdrawal from taxable will be reported on my surviving parent's tax return for that reason regardless of if it's gifted or how it's gifted, is my understanding but I don't get how the actual gifting of it matters.
I see it at as two separate issues, a) taxes paid on the gains if any or taking a loss for that matter, and b) filling of a 709 if required, way I read it your mom will not need to file a 709 if giving cash to use today and under the exclusion amount.

Edit: No other action/filling should be needed for the gifting in your case
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Re: Gifting planning for upper 60s widowed.

Post by JW-Retired »

runner9 wrote: My surviving parent has pretty much decided to gift $14K each to 2 children (28K) one time only, at least for now.

These will most likely come from a taxable account, Ohio Tax-Exempt Money Market (VOHXX) which currently has $35K in it.

We talked to a Flagship rep today who was pushing for an "in kind" transfer over writing 2 checks, each for 14K. He stated that there needs to be a "paper trail" for the IRS and transferring "in kind" would be better for a paper trail then writing checks.

I don't understand. If under/at the $14K limit what needs to be reported? We talked with him for about 45 minutes and this was the only point I was left confused on.
I don't understand the "paper trail" thing either. However, he may have been offering "in kind" simply because that is the common thing for old parents with appreciated assets to do. If they sell the assets and then gift the $14k cash they need to pay tax on any capital gains realized in the sale of these assets. So it costs them $14k + cap gains tax to gift $14k that way. If they gift the assets in kind the parents avoid the tax.

The cost basis of the assets goes with the gift, so when the children want to turn it into cash they have the same problem. However, usually this is done when the parents are in a higher tax bracket and/or a worse cap gains tax state than the kids. That's the case for DW and I. :beer

Don't know how the taxes might work out in your parent's case? Probably irrelevant with the basis step up.
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Thanks, as far as I can tell my surviving parent and myself/wife are both in the 15% bracket. No idea about my sibling, probably 15% or 25%.

The distributions are 0.0001 per share per month in VOHXX, so with $35K in there I'm guess less than $3 in gains in 6 months.
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Thanks for the replies. Two (I hope) final questions:

This $14K limit is for the entire year. So, should a check be for no more than $14K less non-cash gifts made during the year, such as a gift card for a birthday, a decoration for Easter, etc. Maybe $13.5K just to be safe? Or, am I reading to much into it and $14K for a total in cash/checks.

Secondly, the gift counts in the calendar year the check is written or deposited, or should it be ensured that both are in the same year? That is, if 2 checks are given on Dec. 25 it's possible 1 isn't deposited/cleared until after Jan 1. If this happens the check will count as a gift for which year?

I'm leaning towards suggesting that, if surviving parent still wants to gift up to the max, that 2 checks for $13,500 be written by or before Dec. 25 with clear instructions to my sibling to deposit within a couple of days. (or gift checks around Thanksgiving to eliminate this issue)

Thanks!
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Re: Gifting planning for upper 60s widowed.

Post by BL »

A one-time (or occasional) gift should be no problem, but doing it on a regular basis is not the best idea. She has quite a bit, but widows often feel that this large amount of money needs to be spent, donated, etc., without really considering what may be needed in the future. She needs to work out a financial picture of her future expenses and income (and taxes). There is no rush with the gifting.

Your idea sounds reasonable to me. Maybe earlier so it is not tied to a recurring Holiday would be even better to avoid feeling she has to continue the "tradition".
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Re: Gifting planning for upper 60s widowed.

Post by runner9 »

Thanks, it's currently a one time decision with plans to reassess and consider a few years from not, but not in between.

All advice appreciated, specifically asking about gift tax implications.
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BL
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Re: Gifting planning for upper 60s widowed.

Post by BL »

Here are a couple links I found:
https://turbotax.intuit.com/tax-tools/t ... 12127.html

http://www.forbes.com/sites/deborahljac ... d-to-know/

irs.gov also has the original info.

Basically, you need to file but not pay gift tax if you give over 14k/person/year. The tax doesn't begin until over 5 million. (This is federal. States may vary.)
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