Synopsis: Gifts of cash, investments, and other assets can offer benefits to you as well as your recipients. The IRS allows you to give up to $14,000 in 2017 ($28,000 for married couples) to as many people as you like -- adults or children -- without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. This can be especially beneficial for people looking to minimize their estate taxes.
The Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) allows you to set up an investment account in a child’s name with an adult named as a beneficiary.
Although UGMA/UTMA accounts can be especially good vehicles for college savings, gift givers should bear in mind that any assets held in a child’s name can reduce the amount of financial aid he or she will receive. And although UGMA/UTMA accounts are administered by custodian adults while the children are minors, when they reach the age of majority -- 18 in most states -- the money belongs to them, free and clear. He or she controls the money -- regardless of your initial intentions and wishes -- and is also fully responsible for paying taxes on all earnings.
A special child in your life is about to reach a milestone: 13 years of age. You have no idea what's "in" these days for kids in that age group. The latest computer simulation game? A hot-selling compact disc? Well, maybe, but which one?
In addition to the birthday dilemma, your friends are getting married soon, and you don't have much time to shop for a gift. A check or cash can seem so impersonal; you'd rather give them something with meaning. What can you do?
Consider a gift offering years of potential: investments or assets that may increase in value over time. The IRS allows you to give up to $14,000 in 2017 (or $28,000 if you give jointly with your spouse) to as many people as you like in cash, investments, and/or property without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. This limit may be adjusted for inflation in future years. Couple that with a bit of creativity, and you have gifts that can potentially benefit you as well as the recipients.
A Gift for Children, a Tax Break for You
Along with The Uniform Gifts to Minors Act or The Uniform Transfers to Minors Act (UGMA/UTMA -- depending on your state), the tax break associated with gifts of up to $14,000 (or more, in some cases) annually can help benefit parents and grandparents, as well as children, by diminishing the overall contribution to Uncle Sam's wallet. This can be especially beneficial for adults looking to minimize their estate taxes.
A UGMA/UTMA account allows you to establish a savings or investment account in a child's name, with one adult named as custodian. In many cases, each parent can contribute up to $14,000 annually without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. These funds can be used to secure the child's future -- whether they are for college, marriage, buying a house, or other financial challenges looming in the future. Options can include savings accounts; Series EE U.S. Savings Bonds; individual securities such as stocks, Treasury bills, and zero-coupon bonds; and mutual funds.
Fourteen thousand dollars, however, may seem like a lot to bestow in one year's time. Although most mutual funds have initial investments of $1,000 to $2,500, many lower those requirements on custodial accounts.
Consider the value that even smaller gifts can provide over time. For example, a $2,500 investment made in a zero coupon bond earning 5% interest per year could grow to over $4,000 if left untouched for 10 years. And continuing to make contributions over that 10-year period could have put an 18-year-old entering his or her freshman year further ahead in meeting the college-funding challenge.
Through UGMA/UTMA, the first $1,050 per year of unearned (investment) income is tax free. Under the so-called kiddie tax, unearned income between $1,050 and $2,100 is taxed at the child's rate. All unearned income kids receive above that threshold is taxed at their parents' rate.1
Gifts for Adults
Remember that asset gifts are not limited to children. Generally you can also give adults up to $14,000 a year as well (to as many people as you like) -- and it can be in cash, investments, or property such as land or a piece of artwork (consult a qualified tax advisor for details). Keep in mind, however, that the IRS considers the value of the gift -- its cost basis for purposes of computing gift tax -- to be its value at the time that it's given, not when you originally purchased or invested in it.
Other Gift Options
If you don't feel comfortable with giving substantial gifts directly to your recipients, the IRS allows you to pay for someone's college tuition or medical expenses -- tax exempt -- as long as you write the check directly to the institution. Known as a qualified transfer, this option has no limits for amounts contributed.
A Few Considerations
Although UGMA/UTMA accounts may be good vehicles for college savings, gift givers should bear in mind an important fact: Assets held in a child's name can reduce the amount of financial aid received.
And a word of caution: Although UGMA/UTMA accounts are administered by custodian adults on behalf of the beneficiary, when the child reaches an age defined by each state's law, the money belongs to the child, free and clear. He or she controls the money (regardless of your initial intentions and wishes) and is also fully responsible for paying taxes on all earnings. For these and other reasons, it's wise to give a child the gift of financial education and responsibility along with the account. Some mutual fund companies offer funds especially for children, providing such marketing tools as newsletters, coloring books, and other fun items designed to help educate this age group about the benefits of investing.
When giving investment gifts to adults, you might want to warn your recipients that, should they decide to sell or redeem your gifts, they will be responsible for any taxes on the capital gains.
The next time you find yourself searching for the perfect gift with a bit of special meaning behind it, consider giving assets that will likely appreciate over time. Offering potential benefits to both you and your recipients, such gifts can mean -- and actually be worth -- much more in the years to come.