Gifts seem to be confusing to a lot of people.  Are gift taxes due?  How much can I give? To whom can I give?  Anything with gifting and estate planning is complicated and I advise getting professional advice.  But, with that said, here are some basic rules/concepts.

Annual Gift Tax Exclusion. All American taxpayers have the ability to give up to $14,000 (in 2015) to anyone with zero gift tax implications.  A married couple can each give $14,000 for a total of $28,000.

Gift of a Present Interest.  For the annual exclusion to apply the gift must be a gift of a present interest.  This basically means that the person who receives the gift has use of the gift immediately.  In most cases (there are exceptions) gifts made through trusts are not gifts of a present interest.

Excess Gifts.  If you gift more than the annual limit or if the gift is not a gift of a present interest then the gift is subject to gift tax.  But...there is good news.  You have an additional lifetime unified credit (gift and estate combined) that allows you to give away (in life or death) a total of $5.43 Million without paying gift taxes.  Unfortunately there is bad news too.  If you give a gift that is subject to gift tax you must file an IRS Form 709 even if no tax is due.

529 Exceptions.  Contributions to 529 plans have two specific exceptions in the Code.

Contributions are considered a gift of a present interest even though the person who receives the gift can't use the money until starting college (or other school).

You can make a lump contribution of 5 times the annual exclusion and not need to file the Form 709.  But then you can't make contributions to the 529 until 5 years pass.

Payments to Educational Institutions.  If you make a payment directly to an educational institution (plenty of us know about that) then the annual limit does not apply.

Estate Look Back. Depending on the type of gift, some gifts made within 3 years of death are added back into the estate for estate tax computation.

Medicaid Look Back. When qualifying for Medicaid the government will look back for any gifts made within 5 years of the Medicaid application.  These gifts will be counted as assets of the Medicaid applicant and delay Medicaid eligibility.

By the way, there isn't a family exclusion here.  This applies to gifts to your kids too.

If you've heard me speak, you know I don't recommend doing estate/gift planning without professional advice and if it is estate planning an attorney that specializes in estate planning is a requirement.  Don't do this yourself.

If you'd like some help with your estate and gift plan we'd be happy to help you and connect you with an estate planning attorney if that is what you need too.

If you have not reviewed your plan holdings lately, you may be surprised at what you'll find. Even if you have not made a single change to your plan's investment mix, it's possible that your current asset allocation has drifted from what it was when you first started participating in your employer-sponsored plan.(1) That's why it is a good idea to review your portfolio at least once a year to determine whether it makes sense to rebalance -- or adjust -- your holdings and to ensure that your portfolio holdings fit your current investment needs and circumstances.(2)

Portfolio Drift

To appreciate how performance differences can affect an investment portfolio over time, consider what happened to a hypothetical portfolio of 70% stocks, 20% bonds, and 10% cash left unbalanced for the 20 years ended December 31, 2013.(3) The original 70% allocation to U.S. stocks would have grown to 84%, while allocations to bonds and cash would have shrunk to 12% and 4%, respectively, increasing the overall risk in the portfolio. Keep in mind that past performance is no guarantee of future results.(4)

Making Adjustments

Ideally, adjustments to your asset allocation should occur gradually over the years based on such factors as your projected retirement date, life events such as the birth of a child, and your comfort level with risk. As a general rule, the further away you are from retirement, the larger the role stocks may play in your portfolio.

For each review, calculate how much of your money is in stocks, bonds, and other asset classes. Then decide whether you are comfortable with those allocations. If not, rebalance to bring the allocations back to their intended targets.

Rebalancing your plan account holdings can be accomplished in one of two ways: changing your investment allocations on future contributions or changing your current mix of investments. Either way, you will want to reduce allocations to investments that exceed your target allocation and increase allocations to investments in the underweighted asset.

How often should you consider rebalancing? The usual answer is anytime your goals change; otherwise, at least once a year. However, during times of market volatility, it may be a good idea to keep close tabs on your holdings and make sure they do not drift far from your target allocation.

Source/Disclaimer:

(1) Asset allocation does not assure a profit or protect against a loss.

(2) Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

(3) Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

(4) Source: Wealth Management Systems Inc. Stocks are represented by the total returns of Standard & Poor's Composite Index of 500 stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays Aggregate Bond index. Money markets are represented by the total returns of the Barclays 3-Month Treasury Bills index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

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