Bequeathing investments to children and grand kids in your life-time is a type of tax planning for controlling your property. In this way, you can lower your estate as well as your beneficiaries inheritance tax exposure. However, there are other factors to think about, as you share your wealth with future generations -- not the least of which are the tax consequences you could incur while giving assets including cash, securities, or property to children.
In view of the cash-contribution limitations for 529 Programs, the tax planning of employing UGMA and UTMA accounts may offer greater flexibility for transferring resources to kids. UGMA and UTMA accounts are easy to setup, and most mutual fund and economic service companies offer them. Resources can include money and securities could be transferred into a UGMA or UTMA account and managed at your direction. On drawback, nevertheless, is that the minor gets possession of the account at the age of 18 or 21 (based on state guidelines) - 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 occur in case the resources are sold for an income. Basically, different tax planning to move investments have offsetting pros and cons.
Numerous mothers and fathers and grandfathers and grandmothers seek to offer financial assistance to their children and grandkids for educational and college costs. Section 529 Plans are among popular tax planning for financing higher education costs. Under current federal law, any revenue from all of these plans accumulate on a tax-deferred basis and upcoming withdrawals are tax-free is used for certified higher-education expenditures. Furthermore, these types of programs allow for initial contributions of up to $65,000 with out incurring a federal gift tax ($130,000 for a married couple). When this is completed, the $13,000 annual gift-tax exclusion is pro-rated over following 5 tax years.
However, these types of plans have several limitations and several people choose other tax planning strategies. With 529 accounts, all contributions should be made in money, and the assets in a 529 account must be invested in the investment alternatives provided by the state-sponsored plan. This means you cannot move non-cash resources including shares or mutual fund shares to a child's 529 account. The actual investments in these programs are securities and may be subject to market unpredictability and variation. Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), certified withdrawals are federal income tax free.
As previously mentioned, the yearly federal gift tax exclusion is $13,000 per individual ($26,000 for married couples). The tax planning of gifting has its restrictions. This annual gift exclusion applies to present interest gifts only. Therefore, the question of what constitutes a "present" and a "future" interest as it relates to the exclusion that may present real planning problems with some gifts to minors. Furthermore, while outright gifts to minors pose no certain gift exclusion issues, there are practical, property management obstacles that appear with larger gifts. Actually, several states restrict a minor's legitimate right to purchase, look after, sell, or transfer property.
There are several tax planning strategies for gifting resources to kids, just a few of which are covered in this posting.
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