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University of Chicago Employees: Three Key Strategies for Tax-Free Giving to Your Family

'Gifting is a great way to transfer wealth but if it is not done correctly, it can result in taxes being paid on the wrong account,' says Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement Group.

“High net worth individuals are looking for ways to help their families now rather than later, but they need to make sure their generosity is consistent with a good financial plan,” says Mavar.

In this article, we will discuss:

The tax consequences of giving away money during one’s lifetime as opposed to on death.
Strategies for enhancing tax exemptions when giving out large amounts of money.
The short and long-term effects of gifting on both the donor and the recipient.

The employees of University of Chicago companies are often involved in the financial planning and therefore try to make significant gifts of money to their families while they are still alive rather than only through bequests after death. This trend is easy to explain: it is fun to see the results of such generosity in the modern world, for instance, to help with buying a home in the current real estate market or to pay for college for grandchildren. However, this approach comes with its own set of challenges, especially in terms of tax efficiency.

Giving Wisely: How to Increase the Impact of the Gift While Minimizing the Tax Risk

One of the main benefits of bequeathing assets like stocks is the “step up” in basis, which sets a new value of the asset at the market price at the time of the owner’s death. This means that heirs can sell the inherited stocks at the current high prices without having to pay capital gains tax on the proceeds as long as the sale price equals the stepped up basis. On the other hand, gifts of stocks during one’s lifetime are not exempt from this adjustment. The original purchase price, or basis, stays there, which can result in very high capital gains taxes if the stock is sold when market prices are high.

However, if the gift recipient’s income is below the following limits: $47,025 for singles and $94,050 for married couples filing jointly, they can sell these stocks without having to pay capital gains taxes on them. This creates a perfect situation for University of Chicago employees to help their family members who are starting their careers or earn less than these limits. It is important to avoid such transactions as they may lead to higher taxable income and, therefore, taxes.

Taking Full Advantage of the Gift Exemptions

According to the current rules, an individual can make a gift of up to $18,000 per recipient in 2024 without having to report the gift on his or her tax return and have it count against the taxpayer’s lifetime gift tax exclusion. In the case of married couples, the split gifting technique enables each spouse to make an $18,000 gift to the same person, thus enabling the two to give $36,000 every year tax free. In case gifts are made which are more than these figures, the excess must be reported on IRS Form 709, however, taxes are not due until the exclusion amount is exceeded which is currently $13.61 million. The annual exclusion is also available for gifts that are made during the year of death and in the year following death.

Another way to avoid the annual gift tax exemption is to make the payment directly for the health or education of another person. For instance, payments made directly to educational institutions are not considered as part of the $18,000 annual exclusion for gifts and, therefore, University of Chicago employees can provide generous support without compromising their lifetime gift exemption. This way, the money is used precisely for its intended purpose and there is no chance that the recipient will spend it on something else or become financially dependent.

Assessing the Financial Impacts of Gift Giving

This means that University of Chicago employees should also consider the tax consequences of the financial gift that they are planning to give to their recipient. Support should always be given with the aim of empowering the recipient, not enabling them or making them dependent. This assessment is important in order to determine if the giving is helping or harming the recipient.

The donor’s financial stability is just as important as the recipient’s. Such gifts can be made sustainable by a financial plan that has been developed by professional advisors. In this way, University of Chicago employees can ensure that they are able to give in a way that is consistent with their financial future.

In conclusion, it is an excellent practice to give but it is advisable to know the strategies that can be employed in order to reduce the amount of tax paid and at the same time, achieve the desired results. By looking at the short and long-term consequences of their generosity, University of Chicago employees can make reasonable decisions that will benefit them and their families. For those who are involved in the process of financial gifting, more specific plans and options can be provided by thorough planning tools and the advice of financial professionals.

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An IRA Qualified Charitable Distribution (QCD) can also be a useful approach, especially for retirees. An individual who has reached the age of 70½ can transfer up to $100,000 each year from his or her IRA to a charitable organization. This can help achieve charitable goals while also potentially leaving the donor in a lower tax bracket, as the donation is not included in taxable income and satisfies RMDs. This approach is in harmony with strategic estate planning and holds the advantage of not affecting non-charitable beneficiaries.

Sources:

Internal Revenue Service. 'Gift Tax.' IRS.gov, 2024, www.irs.gov/businesses/small-businesses-self-employed/gift-tax .
Investment Company Institute. '2024 Annual Report on U.S. Retirement Market.' ICI.org, 2024, www.ici.org/research .
Wealth Enhancement Group. 'Estate Planning and Wealth Transfer Strategies.' WealthEnhancement.com, 2024, www.wealthenhancement.com/insights .
U.S. Securities and Exchange Commission. 'Understanding Capital Gains Tax.' SEC.gov, 2024, www.sec.gov/investor .
National Association of Estate Planners & Councils. 'Best Practices in Lifetime Wealth Transfers.' NAEP.org, 2024, www.naepc.org/articles .

What are the eligibility criteria for participation in the SEPP plan for employees of The University of Chicago, and how can factors like years of service and age impact an employee's benefits under this plan? Discuss how these criteria might have changed for new employees post-2016 and what implications this has for retirement planning.

Eligibility Criteria for SEPP: Employees at The University of Chicago become eligible to participate in the SEPP upon meeting age and service requirements: being at least 21 years old and completing one year of service. For employees hired after the plan freeze on October 31, 2016, these criteria have been crucial in determining eligibility for newer employees, impacting their retirement planning as they do not accrue benefits under SEPP beyond this freeze date.

In what ways does the SEPP (Staff Employees Pension Plan) benefit calculation at The University of Chicago reflect an employee's years of service and final average pay? Examine the formulas involved in the benefits determination process, including how outside factors such as Social Security compensation can affect the total pension benefits an employee receives at retirement.

Benefit Calculation Reflecting Service and Pay: The SEPP benefits are calculated based on the final average pay and years of participation, factoring in Social Security covered compensation. Changes post-2016 have frozen benefits accrual, meaning that current employees’ benefits are calculated only up to this freeze date, affecting long-term benefits despite continued employment.

How can employees at The University of Chicago expect their SEPP benefits to be paid out upon their retirement, especially in terms of the options between lump sum distributions and annuities? Analyze the advantages and disadvantages of each payment option, and how these choices can impact an employee's financial situation in retirement.

Payout Options (Lump Sum vs. Annuities): Upon retirement, employees can opt for a lump sum payment or annuities. Each option presents financial implications; lump sums provide immediate access to funds but annuities offer sustained income. This choice is significant for financial stability in retirement, particularly under the constraints post the 2016 plan changes.

Can you elaborate on the spousal rights associated with the pension benefits under the SEPP plan at The University of Chicago? Discuss how marital status influences annuity payments and the required spousal consent when considering changes to beneficiary designations.

Spousal Rights in SEPP Benefits: Spouses have rights to pension benefits, requiring spousal consent for altering beneficiary arrangements under the SEPP. Changes post-2016 do not impact these rights, but understanding these is vital for making informed decisions about pension benefits and beneficiary designations.

As an employee nearing retirement at The University of Chicago, what considerations should one keep in mind regarding taxes on pension benefits received from the SEPP? Explore the tax implications of different types of distributions and how they align with current IRS regulations for the 2024 tax year.

Tax Considerations for SEPP Benefits: SEPP distributions are taxable income. Employees must consider the tax implications of their chosen payout method—lump sum or annuities—and plan for potential tax liabilities. This understanding is crucial, especially with the plan’s benefit accrual freeze affecting the retirement timeline.

What resources are available for employees of The University of Chicago wishing to understand more about their retirement benefits under SEPP? Discuss the types of information that can be requested from the Benefits Office and highlight the contact methods for obtaining more detailed assistance.

Resources for Understanding SEPP Benefits: The University provides resources for employees to understand their SEPP benefits, including access to the Benefits Office for personalized queries. Utilizing these resources is essential for employees, especially newer ones post-2016, to fully understand their retirement benefits under the current plan structure.

How does The University of Chicago address benefits for employees upon their death, and what provisions exist for both spouses and non-spouse beneficiaries under the SEPP plan? Analyze the specific benefits and payment structures available to beneficiaries and the conditions under which these benefits are distributed.

Posthumous Benefits: The SEPP includes provisions for spouses and non-spouse beneficiaries, detailing the continuation or lump sum payments upon the death of the employee. Understanding these provisions is crucial for estate planning and ensuring financial security for beneficiaries.

What factors ensure an employee remains fully vested in their pension benefits with The University of Chicago, and how does the vesting schedule affect retirement planning strategies? Consider the implications of not fulfilling the vesting criteria and how this might influence decisions around employment tenure and retirement timing.

Vesting and Retirement Planning: Vesting in SEPP requires three years of service, with full benefits contingent on meeting this criterion. For employees navigating post-2016 changes, understanding vesting is crucial for retirement planning, particularly as no additional benefits accrue beyond the freeze date.

Discuss the impact of a Qualified Domestic Relations Order (QDRO) on the SEPP benefits for employees at The University of Chicago. How do divorce or separation proceedings influence pension benefits, and what steps should employees take to ensure compliance with a QDRO?

Impact of QDROs on SEPP Benefits: SEPP complies with Qualified Domestic Relations Orders, which can allocate pension benefits to alternate payees. Understanding how QDROs affect one’s benefits is crucial for financial planning, especially in the context of marital dissolution.

How can employees at The University of Chicago, who have questions about their benefits under the SEPP plan, effectively communicate with the Benefits Office for clarity and assistance? Specify the various communication methods available for employees and what kind of information or support they can expect to receive.

Communicating with the Benefits Office: Employees can reach out to the Benefits Office via email or phone for detailed assistance on their SEPP benefits. Effective communication with this office is vital for employees to clarify their benefits status, particularly in light of the post-2016 changes to the plan.