A crucial part of gifting is to determine the amount of money you can comfortably give away. Step number one: Figure out how much your assets, or even your income(s), are presently worth, says Bill Driscoll, certified financial planner and founder of Plymouth, M.A.-based Driscoll Financial.
"Every family is different," says Amy Goyer, national coordinator for the AARP Foundation's Grandparent Information Center, "So, ask yourself, what are your expectations? What are the goals? Then, size up all the options and be open to the idea that plans change."
Once you've gauged your financial footing, be careful not to compromise your ability to take care of yourself, says Joel Larsen, a certified financial planner who heads Larsen Financial Strategies Group in Davis, C.A. If you end up making gifts that are overly aggressive, you could wind up spreading yourself too thin.
For starters, you can make gifts of up to $12,000 per year, per beneficiary – tax-free. Financial planners across the board urge clients to take advantage of this benefit as soon as they possibly can.
"The earlier in life you can start contributing to a tax-free vehicle, do it," says Catherine Avery, portfolio manager for the Greenwich, C.T.-based Dock Street Asset Management.
Plus, current tax laws allow for a gift-tax exemption for monetary gifts of up to $1 million. And, specifically for grandparents giving monetary gifts to their grandkids, there is also a "generation-skipping" tax exemption for gifts of up to $1.5 million. That's good news because it means you can put a sum of money to work immediately -- in a traditional brokerage account or any number of living trusts, for example -- without being penalized by your state or the Internal Revenue Service.
In as many as 85 percent of all gifting transactions, grandparents set aside money with the intention of contributing to education costs for their grandchild, says Financial Strategies Group's Larsen.
Pre-paid tuition arrangements offer the easiest way to do this. Awards can be made directly to a specific college or university. What's more, these contributions to pre-paid tuition plans do not count against the gift-tax or GST exemptions. With this plan, processing of the payment is contingent on your grandchild enrolling in the institution. If he or she does not attend the school, you get the money back and can funnel it to the college they do attend.
There's little not to like about these college savings plan accounts. For one thing, a 529 doesn't count as an asset on financial aid applications. And, these plans are flexible, so you can choose and change beneficiaries as and when you wish. One caveat: Capital gains from these accounts not used to pay for education will be subject to taxes and penalties. (Learn more by reading 529s Making the Grade: Why these college savings plans get straight A's)
Sure, Uniform Gifts to Minors Act (UGMA) accounts have been around a while, but they are still relevant. Maybe that's because investments in these accounts are not restricted, and the first $850 contributed per year is tax-exempt. However, any money removed from the UGMA – be it for 529 transfers or anything else – will be taxed as capital gains.
Note, though, that once your grandchild reaches the legal age of maturity, 18 or 21 depending on the state, he or she will control the account … and can do anything whatsoever with that money.
And, there's a catch for families that require financial aid. Since your grandchild will technically own the UGMA, the funds in this account could cripple his or her chances of receiving funds from colleges.
One thing to know about savings bonds, according to Driscoll of Driscoll Financial: If you purchase savings bonds in the name of your child and, your son or daughter makes less than $65,600 a year as a single parent or less than $98,400 as part of a married couple, then the proceeds from the sale of the bonds can be used tax-free for the grandchild's education.
You can also open a Coverdell Education Savings Account (formerly called an Educational IRA). While you are only allowed to contribute up to $2,000 a year to this plan, the good news is that in addition to using these funds to pay for college tuition, you can also use these funds to help pay private high-school tuition bills.
Much like an UGMA, the grandchild will gain control of a CESA when he or she reaches the legal age of maturity.
A strategy that has gained popularity in recent years is to start grandkids off with a CESA; then, once a grandchild reaches 10 years of age, you can transfer the money tax-free to a 529.
Here are additional options for gifting grandparents in which the funds do not need to be used for educational purposes.
Investing in a mutual fund built on dividend-paying stocks is a way to, in effect, "get paid while you wait," says Dock Street's Avery "and dance a fine line between growth and collecting income now." The dividend payouts can then be directed to the grandkids.
You can purchase a life-insurance policy that has a cash-value component, in addition to the death benefit. This gives you the option of tapping into the cash value for gifting, says Driscoll from Driscoll Financial. This strategy, though, is only as good as the cash that you can generate, which makes the structure of the cash-value component (a stock portfolio, interest-bearing account, other means) crucial.
Let's suppose you were lucky enough to have bought General Electric at $5 a share, or perhaps you bought Coca-Cola at $30 a share.
Bill Keen, president of The Keen Insight Group in Norcross, G.A., and grandfather to 17 recommends this strategy: If you own holdings in such "highly-appreciated stocks," transfer the stock at the current value to a brokerage account in your grandchild's name up to the $12,000 tax-free maximum.
Your grandchild can then sell the stock and collect the difference in capital gains between the original price-per-share and the current price-per-share. Bonus: The penalties for this transaction are based on the grandchild's tax bracket, which is often very low.
The purchase of zero-coupon bonds, which generally mature in seven to 10 years, is another route you can take. Doing so, you can generate a substantial amount of money for younger grandkids – depending on the interest rates and yield curve at the time of purchase. Beware, though, that if the bond market into which you buy has weak spreads, the return may be smaller than you anticipated.
Anegelo Robles, author of College Money Planning (Infinity Publishing, 2007) has a best-kept secret: The Web sites Upromise.com and Babymint.com. Members can collect modest rebates on groceries and other items purchased at participating stores, he says, and direct those savings to 529s, CESAs, or wherever else they want. Over a span of 10 or 15 years, these savings could pile up and make for a substantial wad of cash.
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