What’s the Best Way to Give Money to Children and Grandchildren?
There are several ways you might consider gifting money to your loved ones. In 2018, the IRS allows you to give up to $15,000 annually (or $28,000 if you give jointly with your spouse) in cash, investments, and/or property to each of as many people as you’d like without triggering gift taxes. (This limit may be adjusted for inflation in future years.)
If you’re thinking about giving money to minor children, such as a new grandchild, you might consider looking into The Uniform Gifts to Minors Act or The Uniform Transfers to Minors Act (UGMA/UTMA) — the name depends on your state. An UGMA/UTMA account allows you to establish a savings or investment account in a child’s name, with one adult named as custodian. Each parent or grandparent can contribute up to $15,000 annually without triggering gift tax. The child will receive control of the assets upon reaching the age of majority, which is typically age 18.
With an UGMA/UTMA strategy, the first $1,050 per year of unearned (investment) income is tax free. For children under age 18 or college students under age 24, anything between that amount and $2,100 is taxed at the child’s rate. Any income exceeding $2,100 is taxed at the parent’s rate. For children age 18 or older or college students age 24 or older, all income is taxed at the child’s rate.
Of course, asset gifts are not limited to young children or newborns. You can also give to as many adults as you’d like up to the $15,000 per person annual limit. Keep in mind, however, that the IRS considers the value of the gift its cost basis for purposes of computing gift tax to be its value at the time that it’s given, not when you originally purchased or invested in it. By making a tax-smart financial gift to an adult-aged child, you could help him or her fund a down payment for a home or afford to maximize contributions to an employer-sponsored retirement plan.
If you’re thinking about starting a gifting program, a qualified financial professional may help you evaluate which strategies might be appropriate for your situation.