A Comprehensive Guide to Gifting Money to Your Children: Strategies, Taxes, and Trust Options

When it comes to giving money and passing on wealth to their children and grandchildren, the majority of parents place a high value on generosity, responsibility, and justice. But giving strategically can also be crucial, especially when there are significant family resources.

The age of your children and your goals will play a major role in determining the best way to leave money to your heirs, according to Joe Goldman, a senior wealth planner at City National Bank in Beverly Hills.

Understanding the family’s goals—such as providing for education, leaving an inheritance, or safeguarding assets—and figuring out the best time to pursue them are crucial, according to Goldman. For instance, the family might wish to put aside a specific amount now with the intention of using it later. “.

Although sustaining the family financially for future generations may be one of the primary reasons for transferring wealth, families should be aware of the tax ramifications of doing so in order to fulfill their long-term wealth plans.

It is significant to note that depending on the value and manner of giving, gifts of cash or property may be subject to federal gift or estate tax. In the event that taxes are due, the donor, not the recipient, is responsible for paying them. If necessary, estate tax is normally deducted from the estate of the departed donor.

The highest federal estate and gift tax rate in effect at the moment is 40%. While estate tax is levied after a donor passes away, gift tax is applied while the donor is still alive.

Even if a donor hasn’t used up all of their lifetime gift tax exemption, gifts from them that total more than $15,000 within a single year need to be reported to the IRS using Form 709.

In 2021, the lifetime gift tax exemption is $11. 7 million. When a donor passes away, the IRS will use the data on Form 709 to update the donor’s remaining gift tax exemption and determine whether federal estate taxes are owed. Federal estate taxes are addressed on IRS Form 706 following an individual’s death.

In addition to the federal tax, some states also have state gift or estate taxes that may be applicable.

Estate planners can create trusts in several states to benefit from advantageous jurisdictions, according to Joe Goldman, a trust advisor at Beverly Hills’ City National Bank. States differ not only in their income tax rates but also in the length of time that a trust may exist. For instance, a trust can be set up to last forever in Delaware, but it can only last a certain amount of time in California. “.

According to NerdWallet, residents of twelve states and the District of Columbia are currently subject to estate taxes, with exemption levels ranging from $1 million to $5 million. 74 million.

What Is an Education Fund?

A 529 plan is a tax-advantaged investment account designed to encourage college savings. Whether you want to fund a private education throughout your childs lifetime or pay for higher education, a 529 education savings account could be a powerful option, said Goldman.

A 529 savings account can be opened by anyone on behalf of a beneficiary, although parents or grandparents are usually the ones who do so.

The money in the account grows tax-deferred, and withdrawals are free of taxes as long as they are used for approved educational costs like tuition, books, supplies, and lodging.

State governments oversee a number of 529 programs with varying regulations. For example, certain states offer a state income tax credit or deduction for contributions made into 529 plans.

Additionally, gift tax regulations apply to 529 plans even though annual contributions are unlimited. Each state sets an aggregate limit for 529 plan balances.

For instance, the maximum balance for a 529 plan in California is $529,000. “Under the annual gift tax exclusion, donors may contribute up to $15,000 annually to each beneficiary, including into a college savings account for that beneficiary,” according to Goldman. “A married couple can contribute $30,000 per child or grandchild to a 529 plan in a single year, tax-free, as each donor can give that much to a descendant.” “.

Furthermore, Goldman added, gifts of five years’ worth of annual exclusion gifts can be made all at once to a 529 plan, frontloading contributions without affecting the gift tax exclusion. So, you and your partner can open a 529 account for your child or grandchild and make an immediate contribution of up to $150,000 as gifts that are exempt from federal taxes.

“The benefit of frontloading the plan is that it gives the money more time to grow, particularly if your child is young,” Goldman stated. “You might be taking that money out of your taxable estate at the same time.” “.

To illustrate, Goldman stated that grandparents who have five grandchildren could each deposit $150,000 to lower their estate by $750,000 without affecting their gift tax exemption.

You can use the money in a 529 plan to pay for graduate or college education. Furthermore, tax-free withdrawals of up to $10,000 annually may be made to cover elementary, middle, and high school tuition at private and parochial schools.

Apart from funding a 529 tuition plan, there are other tax-efficient methods to leave money for your heirs, such as contributing to:

• Educational Institutions. According to Goldman, “donors do not consider it a gift when they pay tuition directly to an educational institution instead of giving the money to their descendants.” Certain authorized medical costs may also be paid in full and are not gift-worthy. “.
• Dependents. Direct financial transfers to your dependent children are likewise gift tax exempt. “You have less control over what your minor children do with the money when they come of age, but you can give them money with a Uniform Gifts to Minors Account (UGMA) or a Uniform Transfer to Minors Account (UTMA),” stated Goldman. “When they turn 18 or 21, they might be able to access the money and use it for anything, depending on the state you live in.” “.

It should be noted that while this isn’t always the case, people occasionally mistakenly believe that naming their adult children on bank accounts can help them avoid paying estate or gift taxes.

“Adding the name of your adult child to your accounts would count as a gift, even though that might seem like a simple thing to do,” Goldman stated. “Your gift tax exemption would be impacted if you were audited.” “.

Furthermore, a child may withdraw all or part of an account after being added as a joint owner, according to Goldman, or the account may become subject to the child’s creditors. The account might be a part of the child’s total assets in the event of a divorce. The account might become part of the child’s estate in the event of the child’s death.

Trust agreements specify how assets will be distributed, and they can be created for adults or minors.

In addition to serving as a way to lower the amount of your future taxable estate, a trust is an excellent tool for expressing your intentions regarding your gift, according to Goldman. He explained, “You can set up a timeline for distributions based on age or specific events, like buying a home or starting a business, or you can limit distributions to pay for education or health care needs.”

There are several strategies that a client can discuss with their tax, legal, and other advisors based on their objectives and situation. The options most commonly used today are below.

Intentionally Defective Grantor Trust (IDGT)

According to Goldman, this is a common tactic to implement in a low-interest environment. An irreversible grantor trust (IDGT) is a kind of trust that is usually used to transfer assets to the grantor’s descendants. An IDGT essentially permits the growth of trust assets income tax-free because the grantor is still accountable for the income taxes generated by the assets.

You can sell assets to this kind of trust in return for a promissory note that bears market-rate interest. When the trust assets increase at a rate higher than the applicable interest rate, the strategy works best.

“If the asset is expected to appreciate, like stock in the family business that is expected to be sold eventually, the IDGT makes a lot of sense,” Goldman said. The assets may be sold by the trust to a third party buyer, and the proceeds may be kept and dispersed in accordance with the trust’s guidelines. “.

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