By Yann Kostic and Tom Zachystal from the April 2018 Edition
Back in the day, grandparents might have given their grandchildren small cash gifts for birthdays and holidays. Nowadays, however, with the cost of education rising and concern over job opportunities for recent graduates, grandparents may wish to pass on major assets to their children and grandchildren. If so, you may want to consider one of the following three strategies: give cash or stock, or make a 529 plan contribution.
Cash First, you can just give cash. In 2018, under the IRS’s annual gifttax exclusion, each person may give up to $15,000 per individual with no tax consequences. So you and your spouse could transfer $30,000 to each of your children and grandchildren.
Stocks Or you can give a gift of stock. You may, for example, decide to give your grandchild $10,000 worth of stock that you purchased for $5,000 more than a year ago.
The transfer is not taxed, and the stock can continue to (hopefully) appreciate. But if your grandchild ever needs the cash, he or she will have to pay taxes on the capital gain the difference between what you paid for the stock ($5,000) and its current value.
Is this a negative? Not necessarily. It’s likely that your grandchild will be in a lower tax bracket and have a lower capital gains tax than you would.
529 plan contribution Finally, if your grandchild is saving for college, you could make a 529 plan contribution. This education savings plan helps families save funds for their children’s (increasingly expensive) college costs. You can contribute up to $15,000 per year to each child or grandchild’s 529 plan. However, the law allows you to “front load” five years’ worth of contributions at once, which means you can contribute up to $75,000 in 2018.
Therefore, you and your spouse together can contribute up to $150,000 to a grandchild’s 529 plan literally a sea of change from the old days.
Exceptions to the Rules Of course, there are exceptions, which are gifttax exempt, preserving the full annual gift tax exclusion: Gifts to a qualified charitable organization or to an educational institution for a student’s tuition.
For instance, if your grandchild attends college, you might pay his/her tuition directly to the school for the 2017-2018 school year. The payments do not count against the annual gift tax exclusion so you could still give her $15,000 in 2018.
These are basic strategies, but each of them offer a good few possibilities and, since situations differ, you might want to dis-cuss your personal financial circumstances and goals with your advisor before choosing one of these strategies.
Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice for your particular situation.
Yann Kostic, MBA and Tom Zachystal, CFP, are Presidents of their respective Assets Management firms, both US-Registered Investment Advisors (RIA). Tom is the San Francisco Financial Planners’ Association President. Tom and Yann cater to US expats in Mexico and worldwide. Comments, questions or to request his newsletter, “News you can use” contact him at yannk@atlantisgrp.com, in the US at (321) 574-1 529 or in Mexico, (376) 106-1613.
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