Bequeathing investments to kids and grandchildren during your lifetime is a tax strategy for managing your estate. In this way, you may lower your estate and your inheritance tax exposure. But there are other factors to think about, as you share your wealth with future generations -- not the least of which are the tax effects you could incur when giving investments such as cash, securities, or property to minors.
Numerous parents and grandparents aim to offer financial help to their kids and grandkids for educational and university expenses. Section 529 Plans are among common tax strategies for financing higher education expenses. Under present federal law, any revenue from all of these plans build up on a tax-deferred basis and future distributions are tax-free is used for certified higher-education expenses. Furthermore, these types of plans permit for initial contributions of up to $60,000 with out incurring a federal gift tax ($120,000 for a married couple). Once this is completed, the $13,000 annual gift-tax exclusion is pro-rated over following five tax years.
However, these types of programs have several restrictions and several people opt for other tax strategies. With 529 accounts, all contributions should be made in cash, and the possessions in a 529 account should be invested in the investment choices offered by the state-sponsored plan. This means you cannot transfer non-cash resources including shares or mutual fund shares to a child's 529 account. The actual investments in these plans are securities and may be subject to industry volatility and variation. Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), certified withdrawals are federal income tax free.
Because of the cash-contribution restrictions for 529 Plans, the tax strategies of employing UGMA and UTMA accounts may offer better flexibility for moving assets to young ones. UGMA and UTMA accounts are easy to setup, and most mutual fund and economic service companies provide them. Resources may include money and securities can be moved into a UGMA or UTMA account and maintained at your direction. On drawback, however, is that the minimal receives possession of the account at the age of 18 or 21 (depending on state guiidelines) - an age at which most children have yet to develop financial sensibility. Also, the income from the underlying investments is subject to state and federal income taxation. Capital gains taxes can also happen in the event that the resources are sold for an income. Basically, different tax strategies to move investments have offsetting pros and cons.
As previously mentioned, the annual federal gift tax exclusion is $13,000 per person ($26,000 for married people). The tax strategy of gifting has its restrictions. This particular annual gift exclusion relates to present interest gifts solely. Therefore, the concern of what constitutes a "present" and a "future" interest as it relates to the exclusion that may present real planning problems with several gifts to minors. Additionally, while outright gifts to children pose no certain gift exclusion problems, there are practical, property management hurdles that appear with larger gifts. In fact, some states limit a minor's legitimate right to purchase, care for, sell, or transfer property.
There are several tax strategies for gifting assets to kids, just a few of which are included in this post.