Best Ways to Give Your Heirs Money While You’re Alive

estate reviewSeveral years ago, a new theme emerged in the financial planning industry. Clients were beginning to truly worry about their children’s financial futures.

Increasingly, the demand to find ways to assist their kids now, rather than waiting to leave them money and assets in their wills, is on the rise. 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.

Below are some smart planning ideas you can employ to make financial gifts to your adult children and a little cautionary advice…

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 there is a limit for the amount of money which parents can give each of their children without incurring a gift tax. If you wish to hand over more than the limit, you’ll want to discuss it with your Vermillion financial advisor due to the complexity of the current 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 for 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 Stock

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.

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 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 gifting tax 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.

estate review 2How 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 advisors 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.


Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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