Five Strategies for Gifting to Adult Children

Do you want your children to succeed in life?

Of course you do. Giving to your children can be a wonderful way to help them achieve something they might not be able to do indepen­dently. (That’s assuming your finances are in a good place.) Here are five strategies to consider when gifting to your children.

1. Family Vacations

If you have grown children, they likely have their own families, careers, and busy schedules. For these reasons, a family vacation can require much patience and planning up front. Here are some tips:

• Consider renting a home for a week. You can rent through Vrbo, Airbnb, or local rental companies.
• You could pick up the cost of the house, limiting out-of-pocket expenses for your kids.
• Assign cooking respon­si­bil­ities to a different person or family daily, so it feels like a vacation for everybody. What better way to remind your children and grand­children that there’s no free lunch than by having them provide lunch for the family?

With a quick search, I found a four-bedroom villa in Hilton Head, South Carolina, for $3,400 a week. Factoring in trans­portation costs, the occasional meal out, a round of golf, and a spa day, you’re looking at a total of around $6,500. That’s not too bad, consid­ering you’ll enjoy a nice vacation, give a meaningful gift, and make memories with your children. A trip can be a wonderful way to give to your kids without derailing your retirement budget.

Benefits:

• Your children and grand­children benefit by getting a low-cost vacation in a place they might not have been able to afford on their own.
• You avoid the incon­ve­nience of hosting at your own house.
• A shared vacation can bring your family closer together. In addition, you get to watch them enjoy your gifts.

2. Funding Retirement Accounts for Children

For many young adults, saving isn’t the priority it should be. You can encourage your children and grand­children to make saving a habit by contributing to a retirement account. Here are some tips:

• Consider beginning as soon as the child has taxable earned income.
• The annual contri­bution limit to a Roth IRA is currently $7,000 a year for those under 50.
• You and your child (or grand­child) can contribute $7,000 annually or 100% of their income, whichever is less.
• As they get older and start making more money, consider matching their contri­bu­tions, rather than making an outright gift. You may want to establish the ground rule that if they ever take money out, you’ll stop contributing.

3. Annual Gifting Strategy

If you have the resources to care for your own needs for the rest of your life, giving assets to your children can greatly impact their quality of life and help from an estate planning perspective.

• Currently, every individual has a lifetime giving allowance of $13,990,000. Until you exceed that, there’s no tax on any gifts.
• On top of that, you and your spouse can each gift $19,000 per year, per recipient, without reducing your lifetime gift allowance. You’ll need to file an infor­ma­tional tax return if you exceed the maximum yearly amount.
• For many young people, receiving an annual $38,000 gift has the potential to be a life-changing sum of money. You may consider giving a smaller amount first and observing how they handle it. If they use it wisely, you might consider increasing your gift the following year.
• Lifetime gifting can help Pennsyl­vania residents avoid the 4.5% inher­i­tance tax that your estate would pay if your children inherited those assets after your death.

4. Education and Medical Expenses

One exception to the $19,000 annual gifting limit is that you can give an unlimited amount to your children for tuition or medical expenses. Education can be an excellent way to help your children become more self-sufficient. Additional training, certi­fi­ca­tions, or degrees have the potential to make them more employable or may help them earn more in their current job.

• The money must be paid directly to the educa­tional insti­tution or the medical provider (not the child).
• Although student loan debts are incurred to pay tuition, student loan payments do NOT qualify for the tuition exception unless you cosigned on the loan.
• Medical expenses can be a real burden, especially early in life. You can reduce that burden by paying those expenses without any annual limitations.

5. Gifting Appreciated Stock

This strategy requires you to be familiar with your child’s tax situation. It works best when your child is in the 10% or 12% tax bracket. The current long-term capital gains rate is 0% for someone in those brackets.

For example, let’s assume the parents are in the 24% tax bracket. A few years back, they bought 100 shares of a software company for $4,000. The shares are now worth $14,000—an unrealized gain of $10,000. They would owe $1,500 in capital gains taxes if they sold the shares.

Instead of selling the shares, paying the taxes, and handing over $14,000 in cash, they could gift the 100 shares of stock to their child in the 12% or lower tax bracket. The child could then sell the shares, realize a $10,000 gain, and be taxed at 0% for federal taxes. The child would get the same amount, and the parents would save $1,500.

• The most challenging part of this strategy is knowing if your children are in the 12% tax bracket. We recommend working with a financial or tax adviser who can determine the amount you can give without forcing the recipient above the 12% bracket.
• You can also look for clues that your child is in the 12% tax bracket, including unpaid maternity leave, one parent staying home, job loss, or not having a job right out of school.
• Remember, the capital gains may still be taxable at the state level.

Final Thoughts

Giving your children money during your lifetime can be helpful for them and fulfilling for you. There’s a delicate balance, though.

Warren Buffett says you should give your kids “enough money so they could do anything, but not so much that they could do nothing.” Another one-liner I’m fond of is that money doesn’t change you, it amplifies who you already are.

If you have grown children who are terrific people, money will probably bring out the best in them. If they’re working through some issues and wouldn’t handle the respon­si­bility well, you could consider postponing or gifting through a trust that includes rules regarding access and what the money can be spent on.

Origi­nally Posted: January 20, 2019