“The love you express to your children is infinitely more valuable than any possession you could give them. You can educate them in prestigious schools, dress them in the finest clothes, guide them with the wisest rules, and boldly confront their worst fears. But, if they do not rest in your unconditional love, you are neglecting a much more vital need for their true success in life.”
– from The Love Dare for Parents
Those words of wisdom ring very true. If there is unconditional love within the walls of a household, then a child’s development of sound financial habits will often be a byproduct. Even so, you may also want to bless your kids with monetary gifts. Here are five sound and strategic ways to do so:
1) Contribute to a 529 plan – In Nebraska, each taxpayer family can earn a state income tax deduction on up to $10,000 of contributions to a state-sponsored 529 plan (NEST). Additional monies may be contributed annually; however, gift taxes may come into play if the amounts are over the annual exclusion. These monies will grow tax free, and if the money is taken out for qualified educational expenses in the future (tuition, books, housing, etc.), there is no tax due upon withdrawal. Importantly, not all states offer a state income tax deduction for 529 plan contributions.
2) Fund a Uniform Gift to Minors Account (UGMA) – This is an account that can be opened at your custodian of choice (Schwab, Vanguard, etc.). The contributor does not get any tax benefit for putting money into the account, but there is more flexibility with the future uses of the monies (i.e. not limited to just college), and as long as the Kiddie Tax thresholds are not breached, the taxation is favorable. Keep in mind that UGMA account beneficiaries become sole owners of the monies at age of majority which is 18, 19, or 21, typically (21 for Nebraska).
3) Start a Roth IRA – As long as the account owner has earned income, the greater of 100% of that amount or $6,000 (for 2021) can be contributed to a Roth IRA in their name. Monies in a Roth IRA grow tax-free, and distributions are tax-free as well.
4) Start and fund an irrevocable trust – If you want to make a sizeable gift (think $100k+) to your kids and thus reduce your taxable estate, this is a path to consider. This strategy will involve legal paperwork. Unlike a UGMA account, the dollars remain controlled by the trust and are directed by the trust agreement. For example, if you have two or three children, each could be named as a beneficiary of the trust. You can either state that at certain ages (30, 40, 50, or whatever you choose) a portion of the trust is to be distributed. Or you could make it at the discretion of the trustee or distribute funds at certain milestone events (wedding, first house, first child, etc.). Irrevocable trusts are taxed at their own tax rate.
5) Undecided? Save in your own brokerage account and plan to gift them monies in the future: In 2021, $15,000 can be gifted to an individual without any reporting or paperwork to the IRS. A husband and wife can combine their gifts (known as “splitting gifts”, for some reason) to give $30,000 to one child each year while still falling under this annual exemption ($60,000 if your child is married). Splitting gifts does require the filing of Form 709. So, if none of the first four options catches your eye…you can simply save in your own account and then consider gifting to your kids in the future when there may be some more clarity on how the monies are to be used.
As always, your P&A advisors stand ready to talk through and collaborate on which option may be best for you.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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