Several years ago, a new theme emerged in our wealth advisory firm’s meetings with clients. They were beginning to truly worry about their children’s financial future.
Increasingly, we’ve been asked to help them find ways to assist their kids now, rather than waiting to leave them money and assets in their wills. The parents in their 50s and 60s want to be here to watch and enjoy seeing the ways their children will benefit from their generosity.
If you find yourself thinking along these lines, you are not alone.
Smart Gifting Ideas Plus Some Warnings
Below are some smart planning ideas you can employ to make financial gifts to your adult children and a little cautionary advice.
I encourage you to work with a professional team of advisors, including a certified financial planner, a tax professional and an estate planning attorney.
A great gifting plan involves many moving parts: everything from projecting your lifetime cash flow needs, to analyzing what you paid for the assets you might bestow or sell, to considering the most appropriate tax moves.
Keep in mind that this year parents can give each of their children up to $14,000 ($28,000 for a married couple) without incurring a gift tax. If you wish to hand over more than that, you’ll want to discuss it with your financial advisers due to the complexity of the tax rules.
Sometimes parents prefer to give their grown children cash because it’s the cleanest, simplest and certainly the most obvious thing to do.
But if you own stock that you bought at a much lower price than its current value, a great planning idea is to give the stock to your adult children rather than cash.
Your kids can then either keep or sell the stock. When they do sell it, they’ll pay taxes on the gain based on the amount you paid for it (what’s known as your basis). And if they’re in a lower tax bracket than you are at the time, this will be a win-win strategy, resulting in your family keeping more of the profit by paying less in taxes on the stock sale.
Give Your Kids High-Dividend Stocks
Another great gifting strategy for parents is to give their children stock that has not only appreciated a lot in value but also pays a high dividend.
If you’re in a high tax bracket, gifting this type of stock not only keeps you from having to pay taxes on the gain but also transfers the taxable dividend stream to your kids. Your children might really benefit from that dividend income and may decide to keep the stock for that reason.
It’s important to note that both of these strategies are best used with adult children since they won’t be subject to the “kiddie” tax.
Watch Out for the ‘Kiddie’ Tax
The “kiddie” tax is levied on the “unearned income” – interest, dividends and capital gains – of children under 19 or college students under 24 whose earned income doesn’t exceed half of the annual expenses for their support. For those kids, all of their 2013 unearned income exceeding $2,000 is taxed at the parent’s tax rate.
You might also want to take advantage of the gift tax exclusion available for tuition or medical expenses you pay on behalf of your children.
In these instances, there is no $14,000 limit. And gifts for education and health can be extremely rewarding to you because they’ll help you make your kids’ lives better immediately.
The key is that you have to give the money directly to the educational institution or to the medical provider. The rules are somewhat stringent, so you’ll want to seek professional advice to ensure your gift will qualify for the tax exclusion.
How to Avoid Gifting Mistakes
These are just a few ways to practice smart generosity. Unfortunately, I’ve seen some cases where things went terribly wrong – mostly due to bad planning.
The parents didn’t think carefully about how much they could hand over to their children without owing gift taxes. Or they gave away more than they could really afford, putting their own long-term financial position in jeopardy.
Rushing to act can mean the difference between a well-executed gift and one that could put you in harm’s way. Yes, it may cost a bit to get a team of advisers together to develop a good plan, but it’s money well spent.
It’s a great idea to try to make a difference for your child while you’re here to see the process unfold – it could be one of your most gratifying life moments. Just take your time, think through your approach carefully and don’t do it alone.