An important part of the enhanced planning process is identifying ways you may be able to pass your assets to loved ones in ways that protect them as much as possible from taxes.
A Kiplinger article, Three Ways Parents Can Transfer Wealth to Help Their Kids has some excellent information.
Custodial Accounts
Your first possible option is custodial accounts. When your children are still young, you may want to open a Uniform Transfer to Minors Act account, or UTMA, or a Uniform Gifts to Minors Act account, also known simply as a UGMA. Generally, these accounts are established to save money your kids receive for birthdays, holidays, and other occasions.
When your child is still under 18, the custodian named on the account oversees its assets. But when the custodian’s control ends, typically when your child is between ages 18 and 25, your child gains legal control of the account’s assets.
Alternative Structures
An alternative structure like a trust, a limited liability company, or a limited partnership are all tools to potentially transfer a custodian account’s assets instead of passing them directly to a child. If done prudently, using one of these alternatives may offer new and longer lasting oversight of those assets.
Also, when your kids are young, if you anticipate that a custodial account may one day have a large amount of money, you may want to utilize a trust structure from the beginning.
Note that these alternative strategies rely on state laws as well as your personal family situation, so you should review all your options with your financial services professional well before your kids reach an age where they may be granted access to the money.
Covering A Child’s Costs
Paying for your children’s educational or medical costs may be another way to efficiently pass down some of your assets. Many people, particularly those who have a high-net-worth, may want to simply write their kids a check for those expenses, but that could lead to estate tax or gift tax issues. A wiser route may be to directly pay the educational or medical institution.
In this scenario, you may be able to take advantage of the IRS’s qualified transfer rule, which is part of Section 2503(e) and dictates that direct payments made directly to a child’s educational or medical institution may be excluded from federal gift tax rules.
Furthermore, these types of direct payments may also mean your available annual exclusion and lifetime exemption amounts wouldn’t be reduced. For 2024, the annual gift tax exclusion amount is $18,000 per individual and the lifetime gift exemption is currently $13.61 million dollars per individual over a person’s lifetime.
Benefits Of A Trust
If your child is the beneficiary of a trust fund, it may seem wise to make distributions from the fund to help your child. You may even consider eliminating the trust altogether once your child is an adult. But in terms of strategy, that may not be your best move.
One potential alternative to taking money out of your child’s trust fund, is using some of that money to directly buy assets for your child.
For example, if one of your kids is looking to buy their first home, instead of giving them money from the trust, the trust itself may be able to purchase the home and become the property owner. Your child would then live in the home rent-free.