Do you want to help your children succeed in life? Many do, but how can we help them while encouraging our values? Giving to your children can be a wonderful way to help them achieve something they might not be able to accomplish on their own. Before you consider giving assets away, you should make sure your needs are met first. Here are five strategies to consider when gifting to your children.
1. Family Vacations
If you have grown children, they likely have plenty going on with their own families, careers, and personal lives. If you begin planning far enough in advance, it should be possible to plan a vacation that you can all take together. Here are a few tips:
- Consider renting a home for a week someplace you would all like to visit. You can rent the house through a service like VBRO.com, Airbnb, or a local vacation rental company.
- You could pick up the cost of the house, limiting out of pocket expenses for your kids to travel and groceries.
- Assign cooking responsibilities to a different person or family each day, so it truly feels like a vacation for everybody. What better way to remind your children and grandchildren that there is no free lunch than by having them buy (for the adult children) and prepare lunch for the family?
With only a little research, I found a four-bedroom villa in Hilton Head, SC for $3,400 a week. Add in the cost of transportation for you, the occasional meal out, maybe a round of golf or two and a spa day and, for a total of about $5,500 you can create memories, enjoy a nice vacation, give a meaningful gift, and bring your family closer together. This is one of the more affordable ways you can give something to your family without completely derailing your retirement budget.
- Your children and grandchildren benefit by getting a low-cost vacation in a place that they might not have been able to afford on their own.
- You avoid the inconvenience of having everyone come visit at your house and the requisite cleaning, preparation, and anxiety that comes with it.
- This could bring your family closer together which is particularly important if your children are living far from you. In addition, you get to watch them enjoy your gifts.
2. Funding Retirement Accounts for Children
For many young adults, saving is often not the priority it should be. It is difficult to balance career and family needs with saving for a retirement that seems so far away. Knowing what you know now, you can encourage your children and grandchildren to make saving a habit by making contributions to a retirement account for them. 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 $5,500 a year for those under 50.
- You/they can contribute $5,500 annually or 100% of their income, whichever is less.
- As they get a bit older and start making more money, consider more of a matching system rather than just an outright gift. You may want to establish the ground rule that if they ever take money out, you’ll stop making any future contributions.
3. Annual Gifting Strategy
If you have enough resources to take care of your needs during your lifetime, giving assets to your children could be helpful from an estate planning perspective and can have a large impact on the quality of life for your heirs.
- Currently, every individual has a lifetime giving allowance of $5,490,000. Until you exceed that, there’s no tax on any gifts.
- In addition, you and your spouse can each gift $14,000 per year per recipient without reducing your lifetime gift allowance. In other words, each parent can give $14,000 per person per year (i.e. $28,000 a year). Exceeding the maximum per year amount as well as some gifting by spouses, referred to as “gift splitting”, require an informational tax return to be filed.
- For many young people receiving an annual $28,000 gift has the potential to be a life changing sum of money. You may want to consider giving a smaller amount first and observing how they handle this responsibility. If they do well with that, you might consider increasing your gift the next year.
- Lifetime gifting can also help Pennsylvania residents avoid the 4.5% Inheritance Tax your estate would pay if your children inherited those assets from you after death.
4. Education and Medical Expenses
One exception to the $14,000 annual gifting limit is that you can give an unlimited amount to your children for tuition or medical expenses. Education and retraining can be an excellent way to help make your children more self-sufficient. Additional training, certifications, or degrees have the potential to make them more employable or may help them to earn more in their current job.
- The money must be paid directly to the educational institution or the medical provider and not go to the child first.
- Helping to pay off student loans would NOT count for the exception unless you were a co-signer on the loan despite the fact the debt was originally incurred for tuition.
- Medical expenses can be a real burden, especially early in life. You can help reduce that burden by paying those expenses and not be subject to the annual limit.
5. Gifting Appreciated Stock
This strategy requires you to be familiar with your child’s tax situation and it works best when they are in the 10% or 15% tax bracket. For someone in those brackets, the current long-term capital gains rate is 0%. For example, let us assume the parents are in the 25% tax bracket and they own 100 shares of a stock that is worth $14,000. They originally paid $4,000 a few years ago so the unrealized gain is $10,000. If they sold the shares, they would pay the 15% capital gains tax of $1,500. 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 15% or lower tax bracket. The child could then sell the shares, realize a $10,000 gain and be taxed at 0% for federal taxes. They get the same amount and the parents save the $1,500 in taxes.
- The hardest part of this strategy is knowing if your children are in the 15% tax bracket. We recommend working with a financial or tax adviser who can help determine the amount to gift without forcing the recipient above the 15% bracket.
- Other life events that can clue you into your child being in the 15% tax bracket might be things like unpaid maternity leave, one parent staying home, job loss, or not having a job right out of school.
- Remember, the gain may be taxable at the state level.
Giving your children money during your lifetime can be helpful to them and fulfilling for you. There is a delicate balance though. Warren Buffett says you should give your kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.” Another quote that I’m fond of (origin unknown) is “money doesn’t change you, it just amplifies who you already are”. If you have adult children who are terrific people, money is probably going to bring out the best in them. If they’re still working through some issues and wouldn’t handle the responsibility well, you could consider postponing giving until later or gifting to them through a trust that includes rules regarding access and what the money can be spent on.