Factors and Options to Consider When Gifting Money to Your Children
There are various methods for gifting your children, including bank deposits, trusts, and custodial wallets. Although there are many different options to consider, many people want to know which is the best.
This article will teach you about the different factors you should consider to decide on the best option for you. You will also learn about the different options you have and their advantages.
Factors to Consider
The Purpose of the Money
The first question you should ask yourself is what purpose the money will serve. Is it for leisure, is it for their education, or is it a plan for their future? It could also strengthen them financially for the future or contingency needs.
When you determine the purpose of the money, you may then choose the best option, which is largely dependent on that purpose.
The Age of Your Children
The next question you need to answer is how old your children are. Have they reached the age of legal adulthood? Or are they still kids? Age plays a huge role in the kind of option you choose.
For example, when you want to gift your child money by putting it in a trust, their age will largely determine when they will be eligible to claim the trust. You may also decide to restrict their access to the money until they attain the legal adult age.
The Yearly Exclusion Limit
You should know that, depending on the amount, you may have to pay tax on the money. This is why you need to know the amount cap for which you would have to pay tax.
For example, if the money gift is more than $18,000 per year, you would have to pay tax on it. However, if you and your partner combine to donate, the limit shoots up to $36,000 annually.
Impact of the Gift on the Possibility of Future Financial Aid
It is possible that when the children grow up, they may need financial aid to put themselves through college, medical school, or grants for their businesses. Monetary gifts may affect their eligibility for such aid. That is why you need to know how the gift would impact it.
You should know that if a student has an asset to their name, their chances of getting financial aid decrease. To avoid this, it is advisable to have the trust or gift in your name until the children need it.
In a case where the assets are already in your child’s name, you may have to spend the money on expenses related to the child, such as getting laptops, taking online courses, paying tutor fees for college admission, etc.
Options to Consider
The 529 Plan
If you are planning for your child’s future, especially their education, you may consider the 529 plan. This plan will cover the child’s college fees and other expenses.
One advantage of the 529 plan is that it is tax-free. Not only is saving tax-free, but withdrawals are also tax-free. The plan may also accumulate gains, which are also tax-free.
You should only gift up to the yearly exclusion limit to enjoy the tax-free benefit. However, there is a way to circumvent this. You may decide to give the total yearly exclusion limit of five years all at once. However, this means that if you put money into the plan for the next four years, then it may incur tax charges.
Roth IRA Plan
A Roth IRA is like a savings account for your child’s future. A benefit is that if your child does not use the 529 plan for education purposes, you may transfer the funds into the Roth IRA account and still maintain the tax-free status.
You can put money into a Roth IRA account for your child as long as the child’s annual income does not exceed $161,000 per year. Roth IRA accounts are useful for college expenses and can act as retirement savings. They are better than normal retirement savings because you do not have to face the ten percent penalty charge and get interest on the savings.
Custodian Plan
A custodian plan is appropriate when you want to put an age limit on the gift. You can easily restrict your child’s access to the money till they reach a certain age you want.
“Pending the time your child reaches the stated age, you can assign a relative to manage the funds. You or your partner may also manage the asset on behalf of the child,” says trusts and estates lawyer Tyson Cross of Cross Law Group.
Direct Payments
You may address your child’s immediate needs directly by paying for their expenses. Direct expenses include medical fees, Colleen’s tuition fees, education expenses, and others. There is no yearly exclusion limit for direct payments.
A Trust
For a large sum of money, the best option is to create a trust in the child’s name. When you set up a trust, you can determine who will use the funds and when the child can access them.
You should note that trusts are expensive to set up. This is why it is advisable to only set up a trust if the gift is large. Trusts can also prove complex, and you may need the input of experts from the financial and legal fields.
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