Greetings and glad tidings, the gifting season is here!
Many grandparents come to me saying they would love to give their grandkids a substantial gift for their college funds and future nest eggs, but they don’t know quite how to do it, and they have fears that their grandchildren will be saddled with the taxes.
The first step is to determine how much you can comfortably give away.
Make an honest assessment of your financial health and your long-term goals. You don’t want to compromise your needs or your retirement by spreading your finances too thin.
Next, know the facts about giving.
In January of this year, the law changed to allow individuals to give up to $13,000, per year, per beneficiary tax-free. This $13,000 is excluded from the giver’s lifetime monetary giving allowance. And, the sooner you put that money to work, the better.
Nearly 85 percent of monetary gifts from grandparents to grandchildren will go towards their college education. Prepaid tuition savings vehicles – like 529s – can help in those efforts. The downside, though, is that capital gains from these accounts not used to pay for education will be subject to taxes and penalties.
Grandparents also have the option of opening a Uniform Gifts to Minors Act account. The first $850 contributed to this account is tax-free. The account is automatically put in the hands of their grandchild upon the state’s age of majority.
However, any money removed from a UGMA account will be taxed as capital gains, and the funds may count against him or her when it comes time to calculate financial aid eligibility for college.
To figure out what kind of plan would work best for you, speak to your financial planner or estate-planning lawyer.
Tis the season for gift giving, so don’t be afraid to share the wealth!
James D. Perry
Tags: Financial Planning, Gifting
