gifting $ to adult children in tax efficient way

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Admiral Fun
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gifting $ to adult children in tax efficient way

Post by Admiral Fun »

[Topic is now in Personal Finance (Not Investing) - mod mkc]

Bogleheads,

Older parents have very generously decided to give money to me and my sibling each year - some amount less than the gift tax exclusion.

Their plan is to take distributions over and above their RMDs and gift that money. To me, that doesn't sound advisable due to the added taxes they would incur (though it would not put them in a higher bracket). The other option is selling appreciated ETFs in taxable accounts, which also sounds like a bad idea tax-wise.

An alternative is that they could open two Roth IRAs - one with me as beneficiary and one with my sibling. Then do roth conversions with the "gift money". They would not transfer the money to us until it is needed (likely 5+ years) or we inherit it.

One downside to this roth conversion plan is that it introduces the possibility of exceeding the gift tax exclusion down the road if we need to transfer a lot of it in a single year. That's extra paperwork. Their net worth is mid 7-figures, so estate tax is not an issue.

Another risk is that they could change their mind about the gift since the money would still be in their names. I'm not too woried about this, as there's a high level of trust in our family.

Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?

-Admiral Fun

edit: to keep this simple, assume that parents and kids are in the same tax brackets. It's close enough.
dcdowden
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Re: gifting $ to adult children in tax efficient way

Post by dcdowden »

We give substantial gifts (below gift tax threshold) to both of our adult children each year.
One needs the cash now, so we provide the gift in cash.
The other doesn't need the cash, and they were just investing it in a taxable account.
After discussing the situation with them, we are now providing the gift in a Roth IRA with designated beneficiary.
They will have to wait to get the money, but it should be more tax efficient overall.
junkanoo
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Re: gifting $ to adult children in tax efficient way

Post by junkanoo »

Please realize that if THEY open the Roths in their names, the Roths can't be transferred nor gifted, only inherited.

They can gift you money each year that you and your sibling could use to fund your own Roth.

Remember that a Roth is funded with money that is already taxed. So, unless they either stole the money or got gifted it themselves, it's been taxed just like the other options you have been looking at.

No one likes paying taxes, but using the annual gift exclusion is the best way of shifting assets from one person to another. That is, of course, if they are not overly draining their own accounts to do it.
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Re: gifting $ to adult children in tax efficient way

Post by dingus_khan »

What about gifting the taxable ETFs directly without selling?
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Admiral Fun
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

junkanoo wrote: Mon Jul 08, 2024 11:16 am Please realize that if THEY open the Roths in their names, the Roths can't be transferred nor gifted, only inherited.

They can gift you money each year that you and your sibling could use to fund your own Roth.

Remember that a Roth is funded with money that is already taxed. So, unless they either stole the money or got gifted it themselves, it's been taxed just like the other options you have been looking at.

No one likes paying taxes, but using the annual gift exclusion is the best way of shifting assets from one person to another. That is, of course, if they are not overly draining their own accounts to do it.
Right. The idea would be that parents would liquidate the Roth upon request and then transfer the assets, but in the meantime the money could grow tax free. Taxes are reduced but not avoided altogether.
dingus_khan wrote: Mon Jul 08, 2024 11:17 am What about gifting the taxable ETFs directly without selling?
That's possible, but then there's no step up in basis. I might be wrong, but my intuition says that the total tax paid by us and our parents would be lower if they take from IRA and leave taxable alone.
Mike Scott
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Re: gifting $ to adult children in tax efficient way

Post by Mike Scott »

Capital gains taxes from taxable accounts are probably lower than the income taxes on additional IRA withdrawals above the RMD.
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Re: gifting $ to adult children in tax efficient way

Post by sailaway »

Mike Scott wrote: Mon Jul 08, 2024 11:34 am Capital gains taxes from taxable accounts are probably lower than the income taxes on additional IRA withdrawals above the RMD.
I think OP is comparing parents marginal rate to step up in basis, rather than capital gains.
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Re: gifting $ to adult children in tax efficient way

Post by Lee_WSP »

They don’t have enough cash to gift the annual exemption?

If so, this is not a gift question. This is just a tax efficiency question.
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Re: gifting $ to adult children in tax efficient way

Post by JBTX »

Admiral Fun wrote: Mon Jul 08, 2024 10:56 am Bogleheads,

Older parents have very generously decided to give money to me and my sibling each year - some amount less than the gift tax exclusion.

Their plan is to take distributions over and above their RMDs and gift that money. To me, that doesn't sound advisable due to the added taxes they would incur (though it would not put them in a higher bracket). The other option is selling appreciated ETFs in taxable accounts, which also sounds like a bad idea tax-wise.

An alternative is that they could open two Roth IRAs - one with me as beneficiary and one with my sibling. Then do roth conversions with the "gift money". They would not transfer the money to us until it is needed (likely 5+ years) or we inherit it.

One downside to this roth conversion plan is that it introduces the possibility of exceeding the gift tax exclusion down the road if we need to transfer a lot of it in a single year. That's extra paperwork. Their net worth is mid 7-figures, so estate tax is not an issue.

Another risk is that they could change their mind about the gift since the money would still be in their names. I'm not too woried about this, as there's a high level of trust in our family.

Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?

-Admiral Fun

edit: to keep this simple, assume that parents and kids are in the same tax brackets. It's close enough.
If they are in the 15% tax bracket, then yes they may be better off holding and getting a future step up in basis. To the extent that they would worry about depends on how much capital gains there is, and how long do they think they are going to live. They may not care about waiting 10+ years to avoid modest capital gains.

As to the IRA, it is just timing. They can pull it out now, and get taxed, or they can give it to you upon death and you will pull it out over 10 years. Yes, you are losing some tax deferral benefits over time, but tax rates could go up, or maybe your rates end up higher.

I’m not sure having them convert to Roth really accomplishes much.

We don’t know the amount of the potential estate, or if estate tax including state estate tax is a factor also. Edit: we do know approx amounts but don’t know future estate tax laws.
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

JBTX wrote: Mon Jul 08, 2024 11:43 am I’m not sure having them convert to Roth really accomplishes much.
I'm curious why you think it won't accomplish much.

Using this calculator, I estimate the Roth could save ~$10,000 in taxes over 5 years (compared to transferring money now and putting in a taxable account). https://www.bankrate.com/retirement/rot ... alculator/

The longer the timeframe, the bigger the savings. It's conceivable that we inherit the roth in 10-15 years and then keep it in an additional 10 years. That would be a lot of tax deferred growth.

(Your point about unknown future tax rates is important. As a baseline I'm just assuming no change. The timeline when we would need the money is also unknown.)
delamer
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Re: gifting $ to adult children in tax efficient way

Post by delamer »

Under what circumstances would you or your sibling need the money in 5+ years?

If, for example, it is for college costs for your children then there are other options for the gifts like 529 plans.
Last edited by delamer on Mon Jul 08, 2024 12:37 pm, edited 1 time in total.
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Re: gifting $ to adult children in tax efficient way

Post by sailaway »

delamer wrote: Mon Jul 08, 2024 12:33 pm Under what circumstances would you or your sibling need the money in 5+ years?

If, for example, it is for college costs fir your children then there are other options for the gifts like 529 plans.
If it is for education, the grandparents can pay tuition directly without any consideration for gifts.
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

sailaway wrote: Mon Jul 08, 2024 12:35 pm If it is for education, the grandparents can pay tuition directly without any consideration for gifts.
delamer wrote: Mon Jul 08, 2024 12:33 pm Under what circumstances would you or your sibling need the money in 5+ years?

If, for example, it is for college costs for your children then there are other options for the gifts like 529 plans.
Yes, college costs are one possibility. Existing 529 funds will cover a good chunk. I think it's a 50/50 chance of this new money being used for college. Depends on whether kid goes in or out of state. Since its use is unknown, we would rather not lock up the money in a 529.
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Re: gifting $ to adult children in tax efficient way

Post by toddthebod »

Admiral Fun wrote: Mon Jul 08, 2024 10:56 am Bogleheads,

Older parents have very generously decided to give money to me and my sibling each year - some amount less than the gift tax exclusion.

Their plan is to take distributions over and above their RMDs and gift that money. To me, that doesn't sound advisable due to the added taxes they would incur (though it would not put them in a higher bracket). The other option is selling appreciated ETFs in taxable accounts, which also sounds like a bad idea tax-wise.

An alternative is that they could open two Roth IRAs - one with me as beneficiary and one with my sibling. Then do roth conversions with the "gift money". They would not transfer the money to us until it is needed (likely 5+ years) or we inherit it.

One downside to this roth conversion plan is that it introduces the possibility of exceeding the gift tax exclusion down the road if we need to transfer a lot of it in a single year. That's extra paperwork. Their net worth is mid 7-figures, so estate tax is not an issue.

Another risk is that they could change their mind about the gift since the money would still be in their names. I'm not too woried about this, as there's a high level of trust in our family.

Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?

-Admiral Fun

edit: to keep this simple, assume that parents and kids are in the same tax brackets. It's close enough.
If they are not concerned with having a taxable estate, why limit annual gifts to the exclusion?

Are they spending all of their RMDs? If not, why take out more?

Rank the following from lowest to highest: parents' ordinary income tax rate, parents' LTCG rate, your ordinary income tax rate, and your LTCG rate. If you and your parents have equivalent tax rates, capital gains taxes whether paid by them or you are lower than the income taxes they would pay taking larger IRA distributions.
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Re: gifting $ to adult children in tax efficient way

Post by Jack FFR1846 »

There are a number of what if's here.

What tax bracket are the parents in?
If more taken above the RMD, what tax would that incur?
Would taking this extra money put the parents into IRMAA or a higher IRMAA bracket?
What other fund sources are there? (taxable account, CDs, savings bonds, Roths)

If DW and I were the parents, we'll be hitting the 24% bracket because of Roth conversions. We'd have to pull the money from cash or our Roths to avoid generating taxes and to a lesser number extent, that's what we're doing.

If the parents are in the 10 or 12% brackets, and pulling out more money puts them into the 22% bracket, it's only 22% for money over $94,301, not all of the money. Well under IRMAA limits and really chump change when you get down to it.

Waiting and waiting puts the kids in the situation DW and I are in. Back when we really could have used extra money, none was coming. Now that we're retired and need nothing, our parents are passing and we're inheriting money that's going to put us in higher tax and IRMAA brackets (Inherited tIRAs). Just give cash now and don't worry about the insignificant taxes. You do know that in 2026 taxes are all going up, right?
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Re: gifting $ to adult children in tax efficient way

Post by JBTX »

Admiral Fun wrote: Mon Jul 08, 2024 12:22 pm
JBTX wrote: Mon Jul 08, 2024 11:43 am I’m not sure having them convert to Roth really accomplishes much.
I'm curious why you think it won't accomplish much.

Using this calculator, I estimate the Roth could save ~$10,000 in taxes over 5 years (compared to transferring money now and putting in a taxable account). https://www.bankrate.com/retirement/rot ... alculator/

The longer the timeframe, the bigger the savings. It's conceivable that we inherit the roth in 10-15 years and then keep it in an additional 10 years. That would be a lot of tax deferred growth.

(Your point about unknown future tax rates is important. As a baseline I'm just assuming no change. The timeline when we would need the money is also unknown.)
I guess if I think through it, if the money is not going to be needed by your parents or you anytime soon, and the tax rate stays the same for decades, that converting now into Roth, then holding it in Roth, then Roth inherited, and then held for you for the 10 year period would keep it out of taxable and whatever tax liabilities that would entail. How much that would be I don’t know.
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

Jack FFR1846 wrote: Mon Jul 08, 2024 1:08 pm There are a number of what if's here.

What tax bracket are the parents in?
If more taken above the RMD, what tax would that incur?
Would taking this extra money put the parents into IRMAA or a higher IRMAA bracket?
What other fund sources are there? (taxable account, CDs, savings bonds, Roths)

If DW and I were the parents, we'll be hitting the 24% bracket because of Roth conversions. We'd have to pull the money from cash or our Roths to avoid generating taxes and to a lesser number extent, that's what we're doing.
Good questions... I think parents are in the 24% bracket, and my sibling and I are in 22% bracket. I do not think that distributing the extra money would put parents into a higher bracket.

The only other funding source is index funds in taxable accounts for which there would be LTCG owed.

So the choices for my parents are:
(a) withdraw from IRA in excess of RMDs and gift right away. Funds go into taxable accounts of me and sibling.
(b) roth convert and gift when sibling and I are ready to spend.
(c) Sell appreciated funds and pay LTCG, then gift right away.

It still seems like "b" may be best tax-wise, though I like the simplicity of "a".
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Re: gifting $ to adult children in tax efficient way

Post by toddthebod »

Admiral Fun wrote: Mon Jul 08, 2024 5:08 pm So the choices for my parents are:
(a) withdraw from IRA in excess of RMDs and gift right away. Funds go into taxable accounts of me and sibling.
(b) roth convert and gift when sibling and I are ready to spend.
(c) Sell appreciated funds and pay LTCG, then gift right away.

It still seems like "b" may be best tax-wise, though I like the simplicity of "a".
In both a and b, parents have to pay ordinary income taxes, which are significantly.higher than capital gains taxes.(24% of the entire amount versus 15% of only a portion of the amount.)
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Re: gifting $ to adult children in tax efficient way

Post by ChrisC »

Admiral Fun wrote: Mon Jul 08, 2024 5:08 pm
Jack FFR1846 wrote: Mon Jul 08, 2024 1:08 pm There are a number of what if's here.

What tax bracket are the parents in?
If more taken above the RMD, what tax would that incur?
Would taking this extra money put the parents into IRMAA or a higher IRMAA bracket?
What other fund sources are there? (taxable account, CDs, savings bonds, Roths)

If DW and I were the parents, we'll be hitting the 24% bracket because of Roth conversions. We'd have to pull the money from cash or our Roths to avoid generating taxes and to a lesser number extent, that's what we're doing.
Good questions... I think parents are in the 24% bracket, and my sibling and I are in 22% bracket. I do not think that distributing the extra money would put parents into a higher bracket.

The only other funding source is index funds in taxable accounts for which there would be LTCG owed.

So the choices for my parents are:
(a) withdraw from IRA in excess of RMDs and gift right away. Funds go into taxable accounts of me and sibling.
(b) roth convert and gift when sibling and I are ready to spend.
(c) Sell appreciated funds and pay LTCG, then gift right away.

It still seems like "b" may be best tax-wise, though I like the simplicity of "a".
Hmmmm, for “b” parents have to take RMDs first and then from other funds in their traditional IRAs, convert those other funds to the Roth IRAs. They cannot convert RMDs into the Roth. If their RMDs in 2025 are $75k, they will pay taxes on that amount. Then if they wish to convert an additional amount of $75k, that would pay additional taxes on that amount.

If my children came to me with option “b” after telling them, as I actually plan, to gift them my RMDs in a 2026 at levels just below the gift tax exclusion reporting level, I would look very unfavorable about this idea, given the tax hit, and question whether they’re driven by greed. As of now, my wife and I have converted around $2.2 million in Roth and plan on another $400k to $500k before I take RMDs in 2026. All that we have in taxable accounts and real estate will go to them; and right now we have two children in the 35% bracket and one, like us parents, at the top of the 24% bracket.

Sounds to me that your parents are doing enough without you trying to squeeze more juice from their assets.
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Re: gifting $ to adult children in tax efficient way

Post by snackdog »

Gift taxes don't become an issue until a lifetime threshold of something like $13 million is exceeded.
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Re: gifting $ to adult children in tax efficient way

Post by bongo »

Admiral Fun wrote: Mon Jul 08, 2024 10:56 am Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?
If you have a mega backdoor roth at work but aren't maxing it out, maybe you could take the gift and use it for that. Better than the roth conversion option since you get ownership.
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Re: gifting $ to adult children in tax efficient way

Post by fourwheelcycle »

Lee_WSP wrote: Mon Jul 08, 2024 11:38 am They don’t have enough cash to gift the annual exemption?

If so, this is not a gift question. This is just a tax efficiency question.
Right. We gift to our children and fund our grandchildren's 529s, but only from taxable account dividends and required RMDs. If OP and sibling do not want parents to incur taxes from excess RMDs or selling ETFs in taxable accounts, and don't want to miss the step-up of gifted ETFs, they should just wait for their inheritance.
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

ChrisC wrote: Mon Jul 08, 2024 6:19 pm Sounds to me that your parents are doing enough without you trying to squeeze more juice from their assets.
I said all that I need to say here. Have a good life.
Wow, judgmental.

I did not ask for one cent. My parents would like to give money to us, for which I’m very appreciative. In my view, considering tax consequences is a very boglehead thing to do.
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Re: gifting $ to adult children in tax efficient way

Post by calliecake47 »

Admiral Fun wrote: Mon Jul 08, 2024 10:56 am Bogleheads,

Older parents have very generously decided to give money to me and my sibling each year - some amount less than the gift tax exclusion.

Their plan is to take distributions over and above their RMDs and gift that money. To me, that doesn't sound advisable due to the added taxes they would incur (though it would not put them in a higher bracket). The other option is selling appreciated ETFs in taxable accounts, which also sounds like a bad idea tax-wise.

An alternative is that they could open two Roth IRAs - one with me as beneficiary and one with my sibling. Then do roth conversions with the "gift money". They would not transfer the money to us until it is needed (likely 5+ years) or we inherit it.

One downside to this roth conversion plan is that it introduces the possibility of exceeding the gift tax exclusion down the road if we need to transfer a lot of it in a single year. That's extra paperwork. Their net worth is mid 7-figures, so estate tax is not an issue.

Another risk is that they could change their mind about the gift since the money would still be in their names. I'm not too woried about this, as there's a high level of trust in our family.

Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?

-Admiral Fun

edit: to keep this simple, assume that parents and kids are in the same tax brackets. It's close enough.
I'm just trying to understand this for my own clarification. The suggestion is that the parents convert tIRA to Roth which they would pay tax on and then sometime in the future they would sell Roth shares and gift to the children? Then the children would either use it or put it in a taxable account? Then by doing this the Roth accounts would accumulate tax free, assuming the market is going up, so the children are essentially saving X number of years in taxes? The taxes would be the same for the parents because they are taking RMDs and/or selling tIRAs to make the gift in the first place?

If they sell their appreciated ETFs in the taxable account, they would pay the capital gains rate on that, as opposed to selling or converting tIRAs, which is literal income. Or, they could gift ETFs without selling and then when you need it, you sell it and pay CG tax.

They have to take the RMDs, that can't be converted, so maybe that goes to the children, then maybe transfer over ETFs without selling them to make up the difference. That would have the least tax impact. Since you will be inheriting the money eventually, it doesn't really matter who pays the tax, it all comes out in the wash, so to speak.
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Re: gifting $ to adult children in tax efficient way

Post by David Jay »

toddthebod wrote: Mon Jul 08, 2024 5:37 pm
Admiral Fun wrote: Mon Jul 08, 2024 5:08 pm So the choices for my parents are:
(a) withdraw from IRA in excess of RMDs and gift right away. Funds go into taxable accounts of me and sibling.
(b) roth convert and gift when sibling and I are ready to spend.
(c) Sell appreciated funds and pay LTCG, then gift right away.

It still seems like "b" may be best tax-wise, though I like the simplicity of "a".
In both a and b, parents have to pay ordinary income taxes, which are significantly higher than capital gains taxes.(24% of the entire amount versus 15% of only a portion of the amount.)
I am with Todd, I do not see where "a" or "b" is more tax efficient than "c". They pay 15% instead of 24%.
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Re: gifting $ to adult children in tax efficient way

Post by TomatoTomahto »

ChrisC wrote: Mon Jul 08, 2024 6:19 pm Sounds to me that your parents are doing enough without you trying to squeeze more juice from their assets.
I said all that I need to say here. Have a good life.
We gift our children to the annual no-need-to-report maximum. If one of the kids found a more tax efficient way for us to do so, I would take the suggestion on board. I would then decide whether the suggestion worked for us. The kids have different tax situations, so for the time being we just do it in cash out of taxable accounts.
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Re: gifting $ to adult children in tax efficient way

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Re: gifting $ to adult children in tax efficient way

Post by EricGold »

Admiral Fun wrote: Tue Jul 09, 2024 8:36 am
ChrisC wrote: Mon Jul 08, 2024 6:19 pm Sounds to me that your parents are doing enough without you trying to squeeze more juice from their assets.
I said all that I need to say here. Have a good life.
I did not ask for one cent. My parents would like to give money to us, for which I’m very appreciative. In my view, considering tax consequences is a very boglehead thing to do.
Admiral Fun wrote: Mon Jul 08, 2024 10:56 am Another risk is that they could change their mind about the gift since the money would still be in their names.
Odd that you would view that as a "risk".
Do you view their will as a "risk" in the same way ?
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Re: gifting $ to adult children in tax efficient way

Post by AML4232 »

We gift appreciated stock to our adult kids. Clean, simple and yes, it shifts the tax burden to them. They can use it or save it.
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Re: gifting $ to adult children in tax efficient way

Post by TomatoTomahto »

AML4232 wrote: Tue Jul 09, 2024 10:27 am We gift appreciated stock to our adult kids. Clean, simple and yes, it shifts the tax burden to them. They can use it or save it.
We would like to do this, but one of our core inheritance/gifting beliefs is that every child gets treated the same regardless of financial status, marital status, tattoos, etc. Additionally, we hope that they get the benefit of a stepped up basis (but not too soon :D ).

Are your kids similar financially, or do you sidestep this issue by figuring that everyone’s situation is theirs to deal with.
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

EricGold wrote: Tue Jul 09, 2024 10:27 am Odd that you would view that as a "risk".
Do you view their will as a "risk" in the same way ?
Poor wording on my part. I was trying to acknowledge that Bogleheads generally recommend not counting on an inheritance. People may believe that I can count on funds from "my taxable account" but not from "my parent's roth account". I recently read a thread describing a situation where the father died and the mother re-married, then died, and the new husband changed the will so all the money went to his kids. Things like that are a (small) risk that I don't think applies here. We have a very good and open relationship with our parents.
Last edited by Admiral Fun on Tue Jul 09, 2024 10:46 am, edited 1 time in total.
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Re: gifting $ to adult children in tax efficient way

Post by AML4232 »

They are very different in terms of the amount of wealth built so far but both are on successful trajectories. No surprise the older, married (dual income) child is more financially successful and the younger one is on his way. We gift the same amounts and I believe they both save it. At the end of the day, once we make the gift it is theirs to do with what they will!
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Re: gifting $ to adult children in tax efficient way

Post by J295 »

Parents here with adult children.

We keep it simple. Gift cash, pay for travel, etc. (After checking with children and their spouses to make sure they weren’t opposed to the gifts).

For OP, Is there a reason the parents can’t simply gift cash, and then if the Roth is perceived to be a good idea go ahead and do the Roth and don’t tie it to a “gift.”

That is to say both/and rather than either/or.
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Re: gifting $ to adult children in tax efficient way

Post by smitcat »

AML4232 wrote: Tue Jul 09, 2024 10:27 am We gift appreciated stock to our adult kids. Clean, simple and yes, it shifts the tax burden to them. They can use it or save it.
In many cases that would incurr more taxes and completely remove the potential of step up basis.
smitcat
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Re: gifting $ to adult children in tax efficient way

Post by smitcat »

Jack FFR1846 wrote: Mon Jul 08, 2024 1:08 pm There are a number of what if's here.

What tax bracket are the parents in?
If more taken above the RMD, what tax would that incur?
Would taking this extra money put the parents into IRMAA or a higher IRMAA bracket?
What other fund sources are there? (taxable account, CDs, savings bonds, Roths)

If DW and I were the parents, we'll be hitting the 24% bracket because of Roth conversions. We'd have to pull the money from cash or our Roths to avoid generating taxes and to a lesser number extent, that's what we're doing.

If the parents are in the 10 or 12% brackets, and pulling out more money puts them into the 22% bracket, it's only 22% for money over $94,301, not all of the money. Well under IRMAA limits and really chump change when you get down to it.

Waiting and waiting puts the kids in the situation DW and I are in. Back when we really could have used extra money, none was coming. Now that we're retired and need nothing, our parents are passing and we're inheriting money that's going to put us in higher tax and IRMAA brackets (Inherited tIRAs). Just give cash now and don't worry about the insignificant taxes. You do know that in 2026 taxes are all going up, right?
As a result of your past history posted here I am curious what you have learned along the way.
What are the list of actions you are taking to avoid this same situation with your kids?
EricGold
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Re: gifting $ to adult children in tax efficient way

Post by EricGold »

Admiral Fun wrote: Tue Jul 09, 2024 10:43 am
EricGold wrote: Tue Jul 09, 2024 10:27 am Odd that you would view that as a "risk".
Do you view their will as a "risk" in the same way ?
Poor wording on my part. I was trying to acknowledge that Bogleheads generally recommend not counting on an inheritance. People may believe that I can count on funds from "my taxable account" but not from "my parent's roth account".
Frankly, I don't think you are being honest with yourself. Your parents offered you a gift, and now you view any proposed alternative through the prism of 'your' money. Future gift ? Still 'your' money.

---
When I gift money to my kids I am crystal clear that it is a one time event. Next year might be the same but no promises. It keeps them from falling into your unhealthy mindset.
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Admiral Fun
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Re: gifting $ to adult children in tax efficient way

Post by Admiral Fun »

EricGold wrote: Tue Jul 09, 2024 1:50 pm Frankly, I don't think you are being honest with yourself. Your parents offered you a gift, and now you view any proposed alternative through the prism of 'your' money. Future gift ? Still 'your' money.

---
When I gift money to my kids I am crystal clear that it is a one time event. Next year might be the same but no promises. It keeps them from falling into your unhealthy mindset.
I'm sorry that you feel the need to attack me personally. I'm learning that people have strong opinions triggered by gifting/estate planning questions, especially when they come from the beneficiaries. I wish I had asked this as a tax question, and left out the gift aspect.

To clarify: yes, my parents said that the gift is 'my money'. Let's call it $100 a year over 5 years. Whether that $100x5 is given right away or invested and given as a 'future gift' from a roth IRA years from now doesn't matter to them. They still consider it my money. I'm incredibly grateful for their generosity and I do not presume they will make gifts beyond the $500.
SnowBog
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Re: gifting $ to adult children in tax efficient way

Post by SnowBog »

The way I look at it - "not my money, not my decision..."

Should our parent(s) ever want to gift us money, that's up to them, as well as the "how" they do it. I wouldn't attempt to tell them the best way to do it. If they wanted to take "extra" money from RMD's, gift us shares from taxable, whatever - its their call...

That gets especially complicated when there's a sibling involved - as what you think is best may differ from what they think is best, and your parent may have different views as well. Again, IMHO "not my money, not my decision..."

That's my general viewpoint on all things personal finance. Unless someone explicitly asks me for my opinion and/or "help", I stay out of their business. (I do "gift" graduates a print version of "If You Can" in hopes it will one day mean something to them.) Then again, we also do our best to fall into the "stealth wealth" category - as we also don't want others in our business.

All that said - if I was gifting money to my children, I'm not sure "tax efficiency" would be the deciding factor, especially as there's a host of related considerations. There are two tax considerations - "mine" and "my child's" - which might not always be the same. There's also issues of "cash flow", maybe we have more "cash" (via forced RMD's/social security/pensions) than we spend - and the "easiest" is simply passing that "extra" cash on. There are also considerations on "inheritance", for example gifting appreciated shares may be the most tax effective for all parties at the moment, but it "gives up" the opportunity to benefit from "step up" of cost basis (meaning $0 taxes in the future). Optimizing for one thing might be sub-optimal for something else...

Which brings me back to my original point... If I decided to give a gift to my child, and they came back and told me "you know, I'd really like this other gift instead" - my inclination would be "not your decision and not my problem." I'd hope they simply accept the gift with grace and humility.

If I asked my child, would you rather have "A" or "B" - now that's a different discussion...
afan
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Re: gifting $ to adult children in tax efficient way

Post by afan »

EricGold wrote: Tue Jul 09, 2024 1:50 pm
Admiral Fun wrote: Tue Jul 09, 2024 10:43 am
EricGold wrote: Tue Jul 09, 2024 10:27 am Odd that you would view that as a "risk".
Do you view their will as a "risk" in the same way ?
Poor wording on my part. I was trying to acknowledge that Bogleheads generally recommend not counting on an inheritance. People may believe that I can count on funds from "my taxable account" but not from "my parent's roth account".
Frankly, I don't think you are being honest with yourself. Your parents offered you a gift, and now you view any proposed alternative through the prism of 'your' money. Future gift ? Still 'your' money.

---
When I gift money to my kids I am crystal clear that it is a one time event. Next year might be the same but no promises. It keeps them from falling into your unhealthy mindset.
Interesting. Our kids know that the annual exclusion gifts are part of a long-term strategy and will continue.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
EricGold
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Re: gifting $ to adult children in tax efficient way

Post by EricGold »

SnowBog wrote: Tue Jul 09, 2024 4:53 pm Which brings me back to my original point... If I decided to give a gift to my child, and they came back and told me "you know, I'd really like this other gift instead" - my inclination would be "not your decision and not my problem." I'd hope they simply accept the gift with grace and humility.
My response would have been less polite.
Many moons ago my sister visited us along with her daughter. We invited them to a beautiful tourist spot and treated them to dinner. The girl made a face and said "what a waste of money. I could of bought <something> instead." I was on my best behaviour so I looked at her and said "false choice." She was never a smart one so I'm sure it fell on deaf ears. She grew up into an adult parasite.
smitcat
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Re: gifting $ to adult children in tax efficient way

Post by smitcat »

afan wrote: Tue Jul 09, 2024 5:03 pm
EricGold wrote: Tue Jul 09, 2024 1:50 pm
Admiral Fun wrote: Tue Jul 09, 2024 10:43 am
EricGold wrote: Tue Jul 09, 2024 10:27 am Odd that you would view that as a "risk".
Do you view their will as a "risk" in the same way ?
Poor wording on my part. I was trying to acknowledge that Bogleheads generally recommend not counting on an inheritance. People may believe that I can count on funds from "my taxable account" but not from "my parent's roth account".
Frankly, I don't think you are being honest with yourself. Your parents offered you a gift, and now you view any proposed alternative through the prism of 'your' money. Future gift ? Still 'your' money.

---
When I gift money to my kids I am crystal clear that it is a one time event. Next year might be the same but no promises. It keeps them from falling into your unhealthy mindset.
Interesting. Our kids know that the annual exclusion gifts are part of a long-term strategy and will continue.
Our kids also know it is part of a longer term strategy - how else would they be able to best plan?
StayTheCourse60
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Re: gifting $ to adult children in tax efficient way

Post by StayTheCourse60 »

Our 2 generations (grandparents, parents) view gifting as an estate planning strategy for wealth transfer. It is a tool used to strategically transfer wealth, offering opportunities for the 2 younger generations (parents, grand kids) to backfill annual roth contributions, maxed roth 401ks, grow 529 accounts, or grow UTMA accounts with income that isn't subject to tax and can grow tax free (depending on the account) in an indirect way for the recipient. We view the growth in the grandparents account is much less valuable than growth (or responsible use) in nearly any other investment vehicle or appreciating asset available to the younger two generations. It absolutely works. And so long as it is an available tool, is leveraged and appreciated responsibly by recipients, it will continue indefinitely for the next set of generations that follow. It's why I am looking at a $250k income replacement as my retirement goal. Not to fund a fancy lifestyle for myself, but to help invest in my kids' and grandkids' futures just as my parents have done for myself and my children.

The important understanding in this TOOL is that it CAN stop at any time given irresponsible use/behavior. Maybe it's a cold hand, but both sides see the value in the strategy, so it isn't recognized as cold. And no one in our family looks at it as a way to stop being a productive contributor to society or just burn it on extravagant consumption.

It does allow us to potentially allow for a SAHM/SAHD. Go on a reasonable vacation to create memories together, or invest in our financial futures. All great investments for a future generation!

I know multiple people who work past the age of 60, may or may not have kids, and have net worths north of $20M. And they don't travel, don't give it to charities or family. To each his/her own, but I view it as a missed opportunity to make a serious difference in many people's financial futures. Taking it to the grave or dolling it out at the end at those valuations is likely not as beneficial as an active annualized approach to transferring assets.

I look at my wife and I's Roth IRA account each year and think about how they could be worth $500k+ at retirement, or even look at my daughter's 529 account and know her education will be fully paid for and she won't be burdened by consequential student debt. Or a UTMA account (eventual taxable account) that could be gifted annually for 60 years (untouched) with simple compound growth far exceeding any gifting strategies used for future generations.

Is it everyone's cup of tea? No. Can it be valuable? Untouched compounding growth says absolutely yes!
lazynovice
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Re: gifting $ to adult children in tax efficient way

Post by lazynovice »

We have gifting up to the annual exclusion built into our spending target. Everyone knows it is something that could be cut in an extreme situation. We don’t really differentiate this expense from any other. We plan to give cash each year and pull it in the most efficient way possible from our various accounts just like property taxes or insurance.

I personally prefer to give it to the kids whether they need it right now or not. They can use it for vacations or to fund their Roths or increase their 401(k)s. That’s up to them.
Exchme
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Re: gifting $ to adult children in tax efficient way

Post by Exchme »

Admiral Fun wrote: Mon Jul 08, 2024 10:56 am [Topic is now in Personal Finance (Not Investing) - mod mkc]

Bogleheads,

Older parents have very generously decided to give money to me and my sibling each year - some amount less than the gift tax exclusion.

Their plan is to take distributions over and above their RMDs and gift that money. To me, that doesn't sound advisable due to the added taxes they would incur (though it would not put them in a higher bracket). The other option is selling appreciated ETFs in taxable accounts, which also sounds like a bad idea tax-wise.

An alternative is that they could open two Roth IRAs - one with me as beneficiary and one with my sibling. Then do roth conversions with the "gift money". They would not transfer the money to us until it is needed (likely 5+ years) or we inherit it.

One downside to this roth conversion plan is that it introduces the possibility of exceeding the gift tax exclusion down the road if we need to transfer a lot of it in a single year. That's extra paperwork. Their net worth is mid 7-figures, so estate tax is not an issue.

Another risk is that they could change their mind about the gift since the money would still be in their names. I'm not too woried about this, as there's a high level of trust in our family.

Thoughts on this roth conversion option (vs. outright gift)? Are there any other options?

-Admiral Fun

edit: to keep this simple, assume that parents and kids are in the same tax brackets. It's close enough.
Impossible to say without a lot of information and making a detailed model that includes a lot of future guesses about your parents, yourself, your sibling.

The option you didn't list is for them to gift appreciated shares from taxable. The recipient can then choose to sell and pay taxes or hang on. The best answer is going to depend on everyone's tax bracket. If one generation has AGI below the Long Term Capital Gains phase in point, they should be the ones selling shares. If the parents are in a max bracket and you and your sibling are in middling brackets, then gifting shares is probably best as well. If your parents' bracket is about the same as what yours would be if you inherit their IRA, then it's hard to say, my guess would be having them withdraw from the IRA is probably best.

I don't really get the point of having your parents do Roth Conversions, if they are not making gifts, then their Roth Conversion math would be set by their own tax situation, plus an estimate of the tax bracket you would be in once they pass and you are withdrawing their IRA. It usually would not be wise to do Roth Conversions once RMDs start, at most they might convert to the top of their current IRMAA tier or tax bracket, whichever is smaller, but my guess is that's not a good strategy.
MalteseLover
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Re: gifting $ to adult children in tax efficient way

Post by MalteseLover »

You don't say how old your "older parents" are, or how long they may reasonably expect to live. Some additional considerations (which may or may not apply):

One, some states may have a look back period upon death to include the value of those gifts for purposes of calulating whether the state's estate tax applies. My mom, who lives in NYS, has been making annual gifts to all of her kids and grandkids (they are all adults, btw), and NYS has a "cliff tax" where the entirety of a mid 7-figure estate can be taxed from dollar one if it exceeds a certain mid 7-figure threshold. I believe in NYS it's a 3 year lookback. Her estate could be worth mid 7-figures, so it is a potentially live issue for us. You say that estate taxes are not a factor for your parents, but have you looked into whether their state has an estate tax and when it kicks in?

Second, my mom's investment accounts are invested pretty aggressively (100% equities) as she doesn't need those funds given her income from SS and two pensions (her own and my dad's surviver benefit) covers her living expenses. We took over managing her assets years ago, as her idea of investing was shopping for CD yields (she was born in the 1930s). Given the market performance in the past couple of years, her portfolio is the largest it's ever been, even after accounting for her cumulative annual gifts, which increases the risk that NYS estate tax kicks in (or the Federal estate tax, assuming it sunsets in 18 months).

Third, given her investments are split between a taxable account and a Roth (no tIRA), most of her estate should get the step up in basis, so we think given her health and expected life expectancy it makes sense to preserve those taxable assets for the step up, rather than incurring cap gains by selling and giving us the cash via gifts. I appreciate that qualified accounts don't get the step up, so if a tIRA is the funding source for your parents, then that's really not an issue.

Finally, if you yourself have children, and don't really need the money yourself, it might make sense to have your parents gift directly to your kids rather than to you, as they'd get the money sooner and more tax efficiently than it going to them via you. This is what we decided to do, so when we updated my mom's estate plan, I removed myself as a beneficiary in favor of my children who will split my share of her estate.

And yes, I realize it's a first class problem to have to manage :happy
smitcat
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Re: gifting $ to adult children in tax efficient way

Post by smitcat »

MalteseLover wrote: Thu Jul 11, 2024 2:32 pm You don't say how old your "older parents" are, or how long they may reasonably expect to live. Some additional considerations (which may or may not apply):

One, some states may have a look back period upon death to include the value of those gifts for purposes of calulating whether the state's estate tax applies. My mom, who lives in NYS, has been making annual gifts to all of her kids and grandkids (they are all adults, btw), and NYS has a "cliff tax" where the entirety of a mid 7-figure estate can be taxed from dollar one if it exceeds a certain mid 7-figure threshold. I believe in NYS it's a 3 year lookback. Her estate could be worth mid 7-figures, so it is a potentially live issue for us. You say that estate taxes are not a factor for your parents, but have you looked into whether their state has an estate tax and when it kicks in?

Second, my mom's investment accounts are invested pretty aggressively (100% equities) as she doesn't need those funds given her income from SS and two pensions (her own and my dad's surviver benefit) covers her living expenses. We took over managing her assets years ago, as her idea of investing was shopping for CD yields (she was born in the 1930s). Given the market performance in the past couple of years, her portfolio is the largest it's ever been, even after accounting for her cumulative annual gifts, which increases the risk that NYS estate tax kicks in (or the Federal estate tax, assuming it sunsets in 18 months).

Third, given her investments are split between a taxable account and a Roth (no tIRA), most of her estate should get the step up in basis, so we think given her health and expected life expectancy it makes sense to preserve those taxable assets for the step up, rather than incurring cap gains by selling and giving us the cash via gifts. I appreciate that qualified accounts don't get the step up, so if a tIRA is the funding source for your parents, then that's really not an issue.

Finally, if you yourself have children, and don't really need the money yourself, it might make sense to have your parents gift directly to your kids rather than to you, as they'd get the money sooner and more tax efficiently than it going to them via you. This is what we decided to do, so when we updated my mom's estate plan, I removed myself as a beneficiary in favor of my children who will split my share of her estate.

And yes, I realize it's a first class problem to have to manage :happy
"and NYS has a "cliff tax" where the entirety of a mid 7-figure estate can be taxed from dollar one if it exceeds a certain mid 7-figure threshold."
I thought that NY had a $6.92 Million exemption on the estate tax and that only funds above that exemption fall to the escalating rates above the $6.92 million.
MalteseLover
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Re: gifting $ to adult children in tax efficient way

Post by MalteseLover »

many Google results for NYS estate cliff tax, here's one:

https://www.jpmorgan.com/insights/wealt ... e-planning.
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