If you’re financially secure and want to help your children, there are several factors to consider before generously handing over a sum of cash. On one hand, you might want them to learn how to earn their own way. On the other hand, you might opt to gift them money so they can learn how to best handle it and help them plan for their future.
You can give as much as $15,000 per year to each child without any tax consequences to you. If you have a spouse, your spouse may also give $15,000 per year, for a total of $30,000 annually. If you’re interested in gifting more than that, there is an astounding $11 million-plus that you’re allowed to give away during your lifetime. While understanding the tax implications is necessary, there are certainly other considerations to keep in mind:
Give Now or Give Later?
Around 65 percent of Americans age 55 and older believe that it is better to pass on at least part of their estate while they are still alive. However, many parents end up making unintentionally large retirement sacrifices by gifting beyond their means. This is why having a financial plan and deciding how much money you can afford to give to your children is so important. Consider whether they are truly in need or if you are seeking emotional satisfaction from the giving. Evaluating what you want the gift to accomplish and understanding all of the implications are important.
Open A Custodial Account
Opening an account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA) are good vehicles for a financial gift to your children. These types of accounts are easy to open in your child’s name, usually with a standard form, and someone must be appointed a custodian of the account. Additionally, the custodian is responsible for investing and withdrawing the funds on behalf of the child. However, if the funds are used to cover the support obligations of the parents, then the money must be counted as taxable.
Contribute to a Roth IRA
If your child works, you may contribute to a Roth IRA on behalf of the child in an amount equal to their income or up to an annual cap of $5,500. This contribution does count as part of the $15,000 annually that is allowed as a gift. This money can be invested to allow money to grow for your child’s future.
Is a Roth IRA Conversion Right for YOU?
Ed Slott breaks down the benefits in this 9-minute clip from his appearance on our Your Wealth and Beyond Podcast
Create a Trust
You may also leave money to your children through a trust. This option allows you to control how it is invested, spent and distributed to them. A revocable trust is in effect while you’re alive and can be modified or even revoked. An irrevocable trust enables you to transfer the ownership of the property while maintaining control even after your death. Although, it can’t be altered after creation. Money allocated to children via a trust can be transferred to a child at a specific age or spread out in payments over time.
Consider a Donor-Advised Fund
If you want your children to ensure your philanthropic interests are carried out, consider a donor-advised fund. A donor-advised fund is a tax-smart solution that allows donors to make contributions to an account for the purpose of charitable giving, become eligible to take an immediate tax deduction in the year of the gift, then make recommendations on the distribution of the funds to one or more organizations. The money does not need to be actually granted to the charity in the same year and the money can grow and be distributed later on.
Understand the Kiddie Tax
Congress created the Kiddie Tax to address all unearned income, including interest, dividends, capital gains or royalties for individuals under 19 years of age. This law also prevents parents from giving children assets to reduce their own taxes. The tax rules are as follows:
Communication, planning, and setting expectations are all essential in financially gifting situations. This is especially true when you are considering gifting money to your children or family. If you have concerns about gifting money to your children, the team at Bayntree can help answer your questions.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.