This is the time of year we frantically shop for gifts for our loved ones – another toy, clothing, or jewelry. Holiday shopping can be overwhelming, but maybe this year, you should consider a gift that can grow into something more meaningful.
Each year, we are permitted to give a certain amount free of any federal gift taxes to any person. This is known as the annual gift tax exclusion which is $15,000 this year. If you would like to make a financial gift to a loved one, you should discuss your options with your various trusted professionals such as your estate planning attorney, accountant, and financial advisor.
Gifts such as cash and savings bonds are relatively simple to gift, but the donor retains no control over the asset and the opportunity for growth is relatively low. Cash is usually quickly spent or put in a piggy bank or savings account at little to no interest rate. Bonds also have a low rate of return. The 2021 annual fixed rate for savings bonds is just one-tenth of a percent.
Custodial accounts such as UTMA accounts can be a simple way to gift. The transferor makes an irrevocable gift to a beneficiary and appoints a custodian to control the gift until the minor reaches a specified age (which may not extend past 21 years old in West Virginia). The advantage of these accounts is that the custodian can direct the money for any purpose for the benefit of the beneficiary, but the account is the beneficiary’s for asset and income purposes so it is subject to Kiddie Tax rules and may affect student aid. To avoid the negative impact on financial aid, the account may be liquidated, and the proceeds transferred to a custodial 529 Plan account.
529 Plans provide potential tax-free growth for certain educational expenses. The donor remains the owner, retains investment control over the account, and may change the beneficiary to a relative of the beneficiary. The advantage of these accounts is that they do not impact the beneficiary’s federal financial aid, government grants, or scholarships. But there may be a penalty if the funds are used for non-educational expenses, and they are an asset of the donor, meaning the account is not exempt if the donor needs to apply for long-term Medicaid.
Finally, trusts can be a great option. The 2503(c) Minor’s Trust enables the grantor to shift estate tax liability and income to the younger family members while still controlling the assets. There are special considerations as to whether the grantor should serve as the trustee or if another person or entity should serve as the trustee. The trustee has a broad discretion to manage the principal and income for the benefit of the minor beneficiary to the age of 21 years, but the trust also provides the opportunity for the funds to remain in the trust beyond that age. The disadvantage of the trust is that the grantor will incur attorney fees to have the trust created and if a professional trustee is used there could be trustee fees. Many people choose family members to serve as trustee to avoid the fees.
This holiday season, consider what gifts may be meaningful for your loved ones today and into the future and work with your trusted professionals to achieve your goals. It is never too early to plan!