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Dear Quentin,
My husband and I learned that we had accumulated a sufficiently large nest egg and will not outlive our money. We had always intended to recognize our nieces and nephews in our wills with a modest gift ($10,000 or less). However, we hopefully have many years left ahead of us. Most of our nieces and nephews are just starting college or starting families.
It seems like it would be much more useful for them to receive a gift now. It would give us a great deal of joy to see them use this gift for a wonderful vacation, or paying for extras while in school. This should be easy, but it quickly became anything but.
“‘One niece has a hardship scholarship: If we gave her $10,000, her college would subtract that gift from her financial aid.’”
Firstly, two of our nieces are minors. We did not want to give gifts to them now, because we did not want to trigger a kiddie tax. Secondly, we also did not want them to feel upset when they saw their older siblings getting gifts. Thirdly, we learned that the nieces and nephews in college were still considered dependents, and gifts to them might also trigger a kiddie tax.
One niece has a hardship scholarship: If we gave her $10,000, her college would subtract that gift from her financial aid. Do we give $10,000 to our nephew and another $10,000 to his new bride? That might open us up to providing an additional gift to the remaining clan when they married. Would giving a gift to our nephew — but not his bride — make her feel she is not really part of the family?
Lastly, two of our siblings’ children suffer from substance-use disorder. Experience has already shown us that providing them gifts could fuel poor money choices (e.g., buying more drugs and possibly triggering an overdose). For them, we thought it wise to resume plan “A” and acknowledge them in our will. However, again, we don’t want there to be hard feelings if some cousins get gifts and they do not.
We could really use some input on this.
Bewildered Aunt
Dear Bewildered,
You are correct to not indiscriminately give your nieces and nephews $10,000 merely to ensure fairness.
If you have good reason to believe that some nieces and nephews have ongoing substance-use issues, and would spend the money in an irresponsible way — that is, on drugs and alcohol — you should not feel obliged to do so. Every circumstance is different. You would be a de facto enabler, as opposed to a helper. No one would win.
You could, however, put money in a trust for these relatives and/or consult with their parents about how they could best use the money: Perhaps they could benefit from help with a down payment on an apartment and/or evening classes, or even a Roth IRA or 529 plan. And, yes, a gift could impact your niece’s financial aid. You could wait until she graduates.
It’s smart to consult with your giftees before giving them money. But it can be done delicately. You don’t have to discuss a $10,000 gift with Relative B, C and D, if you are gifting money to Relative A. Don’t turn your goodwill into a drama by making public gifts and discussing your largesse with other family members. The smartest gifts are bestowed quietly.
“‘Don’t turn your goodwill into a drama by making public gifts and discussing your largesse with other family members.’”
You can give $16,000 per year to each of your nieces and nephews without affecting your annual $12.06 million estate-tax exemption. In fact, you and your husband can give $32,000 collectively to one family member without filing a tax return. Most states do not have a gift tax, although some have clawback rules if the gifter dies shortly after dispensing the money.
The “kiddie tax” relates to unearned income rather than gifts. If your nieces’ or nephews’ interest, dividends, capital gains, royalties, taxable scholarships and other unearned income exceed $2,300 in any given year, your gifts may be subject to that tax. It is designed to prevent parents and other relatives from moving income to a lower tax bracket. Read more here.
“A gift to a minor is considered a present interest and qualifies for the $16,000 exclusion if all of the following conditions are met: Both the property and its income may be expended by, or be for the benefit of, the minor before the minor reaches age 21,” according to the Raleigh, N.C.-based law firm Hughes, Pittman & Gupton.
What’s more, “All remaining property and its income must pass to the minor on the minor’s 21st birthday,” the law firm says. On a more macabre note: “If the minor dies before the age of 21, the property and its income is payable either to the minor’s estate or to whomever the minor may appoint under a general power of appointment,” the firm adds.
Deal with your nieces and nephews first and foremost, and be careful about setting a precedent by making large gifts to their spouses.
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