Gifting to Children

Gifting to our children can come in many forms. It can be for college planning needs, to assist in first-time home ownership, to provide a safety net for them, or to lower our estates. Whatever the need, the concepts are basically the same.

The easy and inexpensive transfers involve the UGMA (Uniform Gifts to Minors Act), which are accounts to hold financial assets, basically securities and cash. The UTMA (Uniform Transfer to Minors Act) are accounts that can hold financial assets, real estate, and collectibles. Both let you transfer assets to a custodian (caretaker) of the account for the benefit of a minor. The gifts are tax-free if the total value per year is $12,000 (indexed each year) or less. These accounts cost nothing to set up and involve minimal paperwork.

They work in the following way:

- "Kiddie Tax" in 2006: any child under the age of 18, with more that $750 of unearned income (income that comes from investments) or a total earned income of more than $5,150 must file a tax return. After the first tax-free $850, the next $850 of unearned income is taxed at the child's rate of 10% and the amounts over $1,700 are taxed at the parents' tax rate. The concept of this is to prevent parents from transferring too many assets to children simply to avoid paying income tax.

Words of Caution to Parents

A couple of things to watch out for with UTMA and UGMA accounts:

Education Plans

College plans specifically have assets that will provide either an educational benefit, or will assist in primary or secondary education, and are earmarked for that purpose only. These plans are 529 plans, prepaid tuition plans, or educational IRAs.

They work as follows:

Other Options

For more control, you can elect an irrevocable trust, and name someone else as the trustee to manage and distribute the money according to your wishes until the child reaches an age that you select. Until then, the child will not have any control over the money; although, the trustee can use it for the child's health needs, education, or maintaining a modest lifestyle. These assets are totally out of your estate if you elect an irrevocable trust. Remember, if you retain control in any way with any gifted assets, then the assets will be included in your estate for estate tax purposes.

For special needs situations, one can create a "Special Needs Trust." These trusts allow someone to gift assets into a trust that will be used only for special needs situations. They can be used if you have a disabled child or if you want to provide for the child's basic living expenses. This trust will prevent a reduction in the SSI (social security income) to your child if s/he is eligible for assistance.

All in all, there are many ways to handle gifting to children. Key points to remember are that the annual gift tax exclusion amount is $12,000 (2006). The unified gift tax credit is $1,000,000. It is wise to do a gift tax return in the year that you gift assets, so that there is a record of the gift. Often this is overlooked. Also use caution and set up a trust with an attorney who specializes in estate planning. To help you achieve your most optimal situation, ask your financial advisor to act as your coordinator between an estate attorney and accountant.

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