4 Ways to Give Financial Gifts to Children
By: Solid Serenity Legal Solutions
We often think of Wills, Trusts, and other similar tools when we think of planning for our families’ futures and legacies. These tools generally gift our assets after our death to the people we choose.
But, sometimes there are tax benefits to giving gifts while you are alive. As of February 2021, the total Federal estate tax exemption is $11.7 million. This means that if your estate is less than that amount, your heirs will not pay estate taxes on your estate.
Federal law also allows each person to make tax-free gifts each year of up to $15,000 each for as many people as you choose in addition to other tax-exempt gifts. The gift exemptions will not affect your total estate tax exemption if you follow the requirements.
If you are looking to get the most tax-exempt bang for your buck, here are 4 ways to give financial gifts to children.
(1) Direct Educational and Medical Payments
Payments made directly to the provider as gifts for educational and medical reasons can be tax exempt. However, you must be sure they meet IRS requirements.
Also, keep in mind that these gifts may disqualify the child from need-based scholarships and other awards.
(2) 529 Plans
529 plans are tax-exempt savings plans that allow families to save for their children’s educations. Once the money has been saved, it must be used for qualified reasons, or it will be subject to a penalty tax when withdrawn.
Qualified, tax-exempt expenses from a 529 plan include higher education expenses such as room, board, books, and tuition. In some instances, you may be allowed to fund your child’s K -12 education, up to $10,000 per year.
(3) Minor Custodial Accounts
These accounts are created on behalf of a minor and holds assets for the minor until he or she is 18 years old. Minor custodial accounts are similar to a typical bank account, except the adult manages the account on behalf of the child until the child is 18 or 21.
There are some cons to minor custodial accounts. First, gifts to the account cannot be taken back or changed. Second, if the Custodian of the account dies without a proper estate plan, the account will become part of the Custodian’s estate and pass to the Custodian’s heirs. Third, the ownership of the account will pass entirely to the minor when the minor comes of age. This may be a problem if the young adult is not able to handle managing his or her money responsibly.
(4) Trust on Behalf of a Minor Child
Trusts allow the person making the Trust to place assets and money into the Trust for the benefit of others. The person making the Trust may also put restrictions and requirements on when the beneficiaries may access the assets.
That means you can choose to allow beneficiaries access to the assets fully at a certain age (say 25), in intervals throughout their lifetimes, or however you choose. Trusts also allow you to choose a contingent beneficiary in case something were to happen to the child before they reach the age for distribution.
There are many facets to estate planning and properly reaching your goals for your family. Book an appointment online to discuss your wishes and options for your estate plan.