The easiest and most straightforward way to gift is to give money directly to the recipient. You can give up to $14,000 per year per person without having to file a gift tax return. You can give more than that but it will require the filing of a gift tax return. Some people may not be comfortable with giving such a large gift to a young person or even to some adults. However, there are some other ways to gift that will pay off in years ahead.
If your child is earning income and they receive a W-2 at year’s end, then a great way to gift to them is to establish a Roth IRA. A Roth IRA is an individual retirement account that grows tax free. When the funds are withdrawn from the account there is no income tax paid on the withdrawal. Also, with a Roth IRA, minimum distributions are not required once the owner of the account turns 70.5. Imagine the investment growth potential if you have a child just starting out with their first job and you contribute to a Roth IRA for them. The maximum amount that can be placed in a Roth IRA for 2015 is $5,500.00.
Another way to help your child save for the future is to purchase a permanent life insurance policy for them, such as a whole life, universal life or variable life insurance policy. At young ages life insurance can be very affordable and young people tend to have better health. When the child is older you can continue to pay the premium or have them pay the premium when they are able to afford it. Remember to have the child own the policy because otherwise the policy is still included in your estate. Life insurance may also be used for liquidity in retirement.
Still another way to assist your child, without giving outright gifts, is to lend your child money at favorable interest rates. If they want a car or a home loan, financing those purchases for them could be very beneficial. There is a minimum interest rate that has to be charged because otherwise the loan may have some gift tax implications. Make sure you document the loan and secure the debt with a lien on the home or on the car.
If you have stock that you want to sell, but do not want to incur the capital gains tax at your high rates, then transferring appreciated stock to your child could save significant capital gains taxes. If you are in a high tax bracket and your child is in a low bracket, transferring appreciated stock to your child and then having the child sell the stock may be a great way to save income taxes. Once the stock is sold it is your child’s money, therefore you want to make sure you are comfortable with them keeping those funds.
Another alternative, if you want to have more control over the funds, would be to gift funds into a trust. You can name a trustee to watch over the assets until an age you feel the child will be able to manage the money on their own.
Your estate planning attorney can explain in more detail the best gifting options for you.
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