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Give A Gift With Meaning And Worth
Currently the IRS offers taxpayers a golden opportunity to give substantial and meaningful gifts up to $12,000 annually (or $24,000 if you give jointly with your spouse) in 2008 to as many people as desired in cash, investments, and/or property without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. This limit may be adjusted for inflation in future years. If you mix in a bit of creativity, you have gifts that can potentially benefit you as well as the recipients.
A Gift For Children, A Tax Break For You
The tax break associated with gifts of up to $12,000 (or more, in some cases) annually can help benefit parents and grandparents, as well as the children on the receiving end, by diminishing the overall contribution to Uncle Sam. This is based on the benefits provided by the Uniform Gift to Minors Act (UGMA) and by the Uniform Transfers to Minors Act (UTMA). This can be especially beneficial for adults looking to minimize their estate taxes.
An UGMA/UTMA account allows you to establish a savings or investment account in a child’s name, with one adult named as custodian. However, if you are the custodian of your own gift the account will be included in your estate. In many cases, each parent can contribute up to $12,000 annually without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes.
These funds can be used to help secure the child’s future — whether they are for college, marriage, buying a house, or other financial challenges looming in the future. For certain instances, a trust may be more appropriate than a custodial account. Please consult with a tax advisor regarding your particular situation.
Your options include:
- savings accounts
- Series EE U.S. Savings Bonds
- individual securities such as:
- stocks
- Treasury bills
- zero-coupon bond
- mutual funds
Small Gifts Can Grow Into Big Savings
Through UGMA/UTMA, the first $900 per year of unearned (investment) income is tax-free. For children under the age of 18, $901 to $1,800 in unearned income is taxed at the child’s rate. Beyond $1,800 for children under age 18, the income is taxed at the higher of the parent’s or child’s rate. For children over age 18, all unearned income is taxed at the child’s rate.
Consider the value that even smaller gifts can provide over time. For example, a hypothetical $250 investment mirroring the return of the Standard & Poor’s Composite Index of 500 Stocks (S&P 500) on January 1, 1998, would have grown to $444 by the end of 2007 if left untouched.* And continuing to make contributions over that 10-year period would have put an 18-year-old entering his or her freshman year a bit further ahead in meeting the college-funding challenge.
Twelve thousand dollars, however, may seem like a lot to bestow in one year’s time. Although most mutual funds have initial investments of $1,000 to $2,500, many lower those requirements on custodial accounts.
*Source: Standard & Poor’s. The S&P 500 is an unmanaged index of common stocks generally considered representative of the U.S. stock market. Past performance does not guarantee future results, and individuals cannot invest directly in any index.
| Benefits of UGMA/UTMA Accounts |
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Adults Can Also Benefit
Remember that asset gifts are not limited to children. Generally you can also give adults up to $12,000 a year (as many as you like); and it can be in cash, investments, or property. Be sure to consult a qualified tax attorney for details. Keep in mind, however, that the IRS considers the value of the gift as the fair market value of the property at the time of transfer. Therefore, the gift is valued when it is given, not on the investment date nor at the original purchase although the recipient of the gift receives your cost basis to determine gain, if any, on a future disposition. Cars and collectibles can fall into this category of gift.
Qualified Transfers: Indirect Gifts With Direct Benefits
If you don’t feel comfortable with giving substantial gifts directly to your recipients, the IRS allows another avenue. You can, for example, pay someone’s college tuition or medical expenses on a gift tax-exempt basis — as long as you write the check directly to the institution. This is generally considered a qualified transfer with no dollar limits.
Considerations For Giver And Recipient Alike
Although UGMA/UTMA accounts can be especially good vehicles for college savings, gift-givers should keep several facts in mind:
- Assets held by college-bound children will reduce the amount of financial aid they’re eligible for.
- Although UGMA/UTMA may be good college savings vehicles, gift-givers should bear in mind an important fact: Assets held in a child's name can reduce the amount of financial aid received.
- In some cases, children have 100% access to UGMA/UTMA accounts at the age of majority, depending on state law, and do not have to use the money for educational expenses.
- Adults who sell or redeem gifts at a profit will incur capital gains taxes.
UGMA/UTMA rules make it essential to think ahead. While children are underage, the accounts are administered by custodial adults. When children reach an age defined by each state's law, the money belongs to the child, free and clear. It is important to know that regardless of your initial intentions and wishes, recipients can spend the money as they like; and they are fully responsible for paying taxes on all earnings.
In addition, these situations provide excellent opportunities to educate children about fiscal responsibility.
Points To Remember
- Gifts of cash, investments, and other assets can offer benefits to you as well as your recipients.
- The IRS allows you and your spouse to each give up to $12,000 per year to as many people as you like without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. This limit may be adjusted for inflation in the future.
- This can be especially beneficial for people looking to minimize their estate taxes.
- The Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) allows you to set up an investment account in a child’s name with an adult named as custodian.
- Although many mutual funds require initial investments of at least $1,000, many lower their requirements for a custodial account.
- Through UGMA/UTMA, $901 to $1,800 per year of unearned (investment) income is taxed at the child’s rate for children under 18; anything above that is taxed at the higher of the parent’s or children’s rate. Children over 18 pay taxes on all unearned income at their rate.
- Any assets held in their name can reduce the amount of financial aid they will receive.
- When children reach the age of majority, all assets in their UGMA/UTMA accounts are theirs.
- You can give gifts of up to $12,000 a year in cash, investments, or property to adults as well.
- Remember that should your adult recipient decide to sell or redeem your gift, he or she will be responsible for any capital gains tax.
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Estate and Gift Tax Questions
- How can I minimize taxes on my estate?
- How will estate taxes be paid if I leave no provision in my will?
- How can I determine what my business is worth for estate and gift tax purposes?
- I just made a gift. Do I have to file a gift tax return?
- What is the applicable exclusion amount?
- I intend to make tuition payments directly to my grandchild's college, and I know this will reduce my estate. But would it be better to contribute to a 529 plan instead?
- The death benefit from insurance on my life will be paid to an irrevocable life insurance trust (ILIT). What if those funds are needed to pay my estate taxes?
- Will the value of my 529 account be included in my estate or my beneficiary's estate?
