VOL. 128 | NO. 130 | Thursday, July 4, 2013
Rays of Wisdom
Dana and Ray Brandon
Think Before Giving Money to Children
By Ray and Dana Brandon
Ray’s Take It’s natural to want to help out your adult kids or grandkids financially. However, it’s important to keep a close eye on your own financial situation as well as consider how any gifts could change your relationship with the recipients.
Right now the IRS allows up to $14,000 in gifts to anyone in a single year ($28,000 if jointly with your spouse) without incurring gift taxes. And, yes, you pay the taxes for any larger gifts you make. Making gifts like this could help to reduce your estate taxes later. However, before getting too generous, you should consider how the gifting fits in to your overall financial plan.
With help from your tax attorney or financial adviser, determine the level of investments and investment income you need for your own security – keeping in mind the potential costs of long-term care and other risks down the road. When your investment income for a year exceeds what you need, that could be time to make a financial gift to a kid or grandkid.
You should also talk to your adviser about the form those gifts should take. The Uniform Gift to Minors Act and the Uniform Transfers to Minors Act provide two opportunities for minor beneficiaries. These allow for accounts set up in the child’s name, with an adult custodian. They can hold a wide range of securities as well as cash. These have estate tax advantages and a portion of their income is taxed at the child’s tax rate when the child is a minor.
Another possibility is to set aside funds for college through the popular 529 education plans. You can add funds as you are able and willing and the funds can increase tax-free if they are used for higher education.
Finally, remember that the very best gift you can ever give your children and grandchildren is to remain financially independent yourself.
Dana’s Take “The Entitlement Trap” by Richard and Linda Eyre suggests that expecting handouts from family can sap the initiative of kids and adults. Even though you can afford it, consider if your gift will truly help. Think back to your childhood and how such a gift might have affected you. Chances are that if you’re reading this article you made your own way in world, and that’s not a bad thing.
It’s hard to find any fault with helping to fund a grandkid’s college education, but maybe that help should come with some caveats. Perhaps you match the amount the child saves for college or you match any scholarships the child accepts. Make sure the kid has skin in the game in the form of his or her own effort.
After all, every financial gift to a child or grandchild comes with strings attached. You just don’t want to get tangled up in them.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). Dana has a bachelor’s in finance. Contact Ray Brandon at email@example.com.