Today, guest Blogger, Nichole Coyle, Certified Financial Planner™, talks about three options for gifting funds to the people you love.
Gifting to Family
There are many ways to give gifts to those that you love. Gifts and donations come in many forms, both big and small. When we think of giving gifts, we often think about holidays and celebrations. We think about things like toys, books, clothing, and so on.
Gifts can also be passed on as part of an inheritance throughout the donors lifetime or after the donor has passed away. Many of these gifts come in the form of property, investments, or other monetary donations. Gifting of this nature can get complicated, so it’s a good idea to put a plan in place to make the gift giving process run smoothly.
The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” Essentially, if you give a gift like a vehicle, investments, or write an extensive check to anyone that isn’t your spouse or dependent, then according to the IRS, you’ve made a gift.
When talking about gifts of this nature, the IRS has many rules, and they can seem overwhelming. It is a good idea to work with a financial advisor on your specific gifting goals and desires.
Now that we’ve briefly touched on the gift giving to loved ones, let’s look at some different types of accounts we can utilize.
UTMA (The Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts allow individuals to gift assets to minors without the need for an attorney to create a formal trust. These accounts are essentially custodial accounts that hold and protect minors’ assets until the age of majority in their state.
Assets are considered the minor’s property, so a portion of the assets will go untaxed and another portion taxed at the child’s tax rate. (In 2020, the first $1,100 is considered tax-free, and the next $1,100 is taxed at the child’s bracket, which is 10% for federal income tax.) Custodians can disperse funds for the minor’s benefit without some of the restrictions other accounts impose.
Only so much of the assets are sheltered from higher taxes. Excess income is taxed at the parents’ marginal tax rate. (Anything above the $2,200 in 2020 is taxed at the parents’ tax rate, which may be as high as 37%.) Once the minor reaches the age of majority, control of the assets is handed over to the child. And approximately 20% of the account value is included in consideration for college financial aid purposes, reducing the number of grants and federal loans the child can qualify for.
Also known as a college savings plan, 529s allow individuals to contribute towards a minor’s education without paying the educational institution directly. This is beneficial if you would like to help with a child’s education that hasn’t yet enrolled in a specific school. Many choose to contribute to these accounts throughout the minor’s childhood to use the accumulated assets for higher education purposes.
Some plans offer state tax deductions for contributions made to these accounts. Assets grow tax-free, and as long as they are used for education purposes (like tuition), the value, including earnings, can be distributed tax-free. The owner of the account retains control over the assets and can distribute them as needed and change the beneficiary, asset allocation, and so on. If the 529 plan’s beneficiary receives grants or scholarships, the full amount of their expenses can still be distributed that year without losing the tax-free status.
The funds must be used for educational purposes to retain their tax-free status. If the funds are used for anything other than education, the earnings are subject to income tax and a 10% penalty. While still considered somewhat favorable, 529 plans do still count against federal financial aid. Up to 5.64% of the account value is considered for college financial aid purposes because it is regarded as the parent’s asset.
There are many different types of trusts, but they are created by an attorney and involve a trustee that holds property/assets for the beneficiary/beneficiaries. They often contain assets of all kinds that are managed by financial professionals.
You can put specific conditions on when and how the assets are to be distributed. Trusts can also be used to reduce estate and gift taxes.
They can be complicated and expensive to set up and maintain. There are generally not tax advantages with a living (revocable) trust, and while there can be tax advantages with an irrevocable trust, their irrevocability can be a disadvantage.
While we are just skimming the surface with gifting options, I hope this provides some helpful information. If you consider any of the options mentioned above or just thinking about gifting in general, reach out to a financial professional to help guide you through the process.
As always, if you have any questions and would like to discuss this topic or any other financial topic, please don’t hesitate to contact me!
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Nichole M. Coyle
CERTIFIED FINANCIAL PLANNER™
20333 Emerald Pkwy
Cleveland, OH 44135
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.Cetera is not affiliated with the financial institution where investment services are offered or any other named entity. Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.Investors should consider the investment objectives, risks, charges, and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.