October 8, 2021
For many parents, giving their children or grandchildren a head start in life is one of the most meaningful and satisfying goals they can accomplish. For the families we work with, saving for college is part of the plan, but it doesn’t stop there. They’re looking to pass their wealth down to their minor children in a meaningful way.
When it comes to providing for your children’s or grandchildren’s futures, the first thing to do is develop a plan, or purpose, for the money. This will help you determine how much and what types of assets to transfer to them.
To start, ask yourself a few questions: Is saving on income taxes or estate taxes important? Do you want to have a little more control or say as to how the money is used? Do you have securities that you want to give to the children? If you’ve already been saving for college, should you consider another type of account for additional assets?
Depending on your personal objectives and hopes for the child, you have several options. Here are the pluses and minuses of the four most common methods used to transfer wealth to minor children:
If you’re certain that your little one will pursue higher education, then a 529 savings plan is a smart way to give to children. Currently, a public in-state college averages more than $100,000 for five years for tuition, room and board, and some elite universities cost more than $70,000 a year. So starting to save early is important.
A 529 plan is a state-operated investment plan that offers a number of advantages. You typically do not need to reside in a particular state to save in its 529 plan. For example, you don’t have to live in Utah to open a Utah 529 plan account.
These acronyms stand for Uniform Transfers to Minors Act and Uniform Gifts to Minors Act. UTMA and UGMA accounts are similar in that they are statutory custodial savings accounts for minor children. Generally, the child gains full access to the funds when they reach the legal “age of majority” for the state in which the account was created, typically 18 or 21. The difference is that UGMAs are limited to holding financial assets, such as cash and securities, while UTMAs are more flexible as they can also hold almost any other type of asset, including real estate and fine art.
Named after Clifford Crummey, the first successful taxpayer to use this form of trust, a Crummey Trust allows for the parent to make contributions for the benefit of their minor children that apply toward the annual gift tax exclusion while also placing limitations on when and how the child can access the funds.
Crummey Trusts can also protect assets by allowing the grantor to include conditional terms or requirements to be met in order for a child to receive distributions.
A Grantor Retained Annuity Trust (GRAT) offers the opportunity to pass assets to children in a tax-advantaged manner. As the name suggests, the grantor (in this case, you) retains the right to receive a certain number of annuity payments from the trust, and when the term of the GRAT ends, what is left in the GRAT is distributed to the trust beneficiaries (the children) and is excluded from your estate. Annuity payments are based on an interest rate set by the IRS (Section 7520). Ideally, the contributed assets appreciate tremendously, and the distributed amount will be significantly more than what you contributed. For example, stocks are usually a strong candidate for a GRAT if significant appreciation seems likely.
Remember that gift taxes apply to any gifts over $15,000 per donor to an individual each year. Because there are so many nuances to these methods, it’s important to talk with your financial and tax advisors to help you select the appropriate strategy for your family. Depending on the strategy, you may also need to consult an estate planning attorney.
Once you’ve decided on how to pass down your wealth, I encourage you to sit down with your children or grandchildren and explain to them how you’re thinking through financial decisions. Obviously, they need to be old enough to understand, but the conversation can be done in an age-appropriate way. It could get more detailed as they get older. Your advisor should be able to offer tips and resources to help with this.
And as the kids grow up, it’s also important for you to understand what their dreams and goals are, so you can be sure you’re giving in a way that will have special meaning and truly benefit them.
Editor’s note: This article has been updated since its original July 14, 2017, publication.
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