Tax Strategies To Transfer Assets to Children & Grandchildren

Bequeathing investments to kids and grandchildren during your life-time is one tax strategy for managing your property. By doing this, you can lower your estate and your inheritance tax exposure. However there are other factors to consider, as you share your assets with future generations — not the least of which are the tax effects you might happen when offering assets including cash, securities, or property to minors.

Numerous mothers and fathers and grandfather and grandmother seek to provide financial help to their kids and grandkids for educational and college expenses. Section 529 Plans are among common tax strategies for funding college education expenditures. Under current federal legislation, any kind of revenue from these programs accumulate on a tax-deferred basis and upcoming distributions are tax-free is utilized for qualified higher-education expenditures. Furthermore, these programs permit for initial contributions up to $60,000 without incurring a federal gift tax ($120,000 for a married couple). When this is done, the $13,000 annual gift-tax exclusion is pro-rated over following 5 tax years.    

Alternatively, these programs have several restrictions and some people decide on other tax planning. With 529 accounts, all contributions must be made in cash, and the assets in a 529 account must be spent in the investment options provided by the state-sponsored program. That means you can’t move non-cash resources such as shares or mutual fund shares to a child’s 529 account. The actual investments in these programs are securities and could be subject to market unpredictability and variation. Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), qualified distributions are federal income tax free.

Because of the cash-contribution limitations for 529 Programs, the tax strategies of employing UGMA and UTMA accounts may offer greater flexibility for transferring assets to kids. UGMA and UTMA accounts are really easy to set up, and most mutual fund and economic service companies provide them. Resources may include money and securities could be transferred into a UGMA or UTMA account and maintained at your direction. On drawback, nevertheless, is that the minor gets possession of the account at age 18 or 21 (based on state guiidelines) – an age at which most children have yet to develop financial sensibility. Additionally, the income from the underlying investments is subject to state and federal income taxes. Capital gains taxes can also occur when the assets are sold for an income. As you can see, different tax strategies to transfer investments have offsetting advantages and disadvantages.

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 yearly gift exclusion relates to present interest gifts solely. Thus, the concern of what is really a “present” and a “future” interest as it relates to the exclusion that may present real planning problems with some gifts to children. Furthermore, while outright gifts to children pose no particular gift exemption issues, there are practical, property management obstacles that occur with larger gifts. The truth is, several states restrict a minor’s legal right to purchase, look after, sell, or move property.

There are several tax strategies for gifting assets to kids, only a few of which are covered in this post.