A September 2023 Kiplinger article, Three Ways Parents Can Transfer Wealth to Help Their Kids, has some interesting insights into how you can transfer your assets in ways that may not burden your heirs with extra taxes.
UTMAs and UGMAs
The first possibility is custodial accounts. When a child is still young, some parents open a Uniform Transfer to Minors Act account, UTMA for short, or a Uniform Gifts to Minors Act account, otherwise known as a UGMA.
When the child is still a minor, the custodian named on the account controls all its assets. But when the custodianship
terminates — often when the child is between the ages of 18 and 25 — legal control will fall to the child. But it may not be a wise move to hand a young person that much cash. Luckily, there are options to avoid that very scenario. An alternative structure like a trust, a limited liability company, or a limited partnership are ways to potentially transfer a custodian account’s assets instead of passing them directly to a child. Lastly, if, when your child is young, you anticipate that a custodial account would eventually have a considerable amount of money, you may want to focus on a trust structure from the get-go.
Educational and Medical Expenses
Funding a child’s educational or medical expenses may be another way to prudently transfer some of your assets. Many folks, particularly high-net-worth people, may be inclined to simply write their kids a check for these expenses, but that could bring about estate tax or gift tax issues. A better option may be to directly pay the educational or medical institution. In this scenario you may be able to utilize the IRS’s qualified transfer rule, which is part of Section 2503(e) and dictates that direct payments made to a child’s educational or medical institution may be excluded from federal gift tax rules. Additionally, this kind of direct payment may also mean your available annual exclusion and lifetime exemption amounts wouldn’t be reduced. The annual gift tax exclusion amount is presently $17,000 per individual and the lifetime gift exemption amount is currently $12.92 million dollars per individual over a person’s lifetime. Be sure to discuss this option with your financial services professional and your tax professional.
More Info About Trusts
If your child is the beneficiary of a trust fund, it may seem perfectly reasonable to make distributions from the fund to
assist your child. You may even consider ditching the trust altogether once your child reaches adulthood. But that may
not be the best strategic move. One alternative to simply taking cash out of a child’s trust fund, is using some of its cash to purchase assets for a child. For example, if one of your kids is ready to buy their first house, instead of giving them cash from the trust, the trust itself may be able to purchase the home and become the property owner. The child would then live in the home rent-free. In this example, the home is an asset of the trust and therefore has the same creditor protection as its other assets. This may be helpful if the child one day runs into creditor issues or goes through a divorce. If your child doesn’t need the money in the trust at any point during their life, leaving those assets untouched within the trust means they wouldn’t be included in the child’s own estate for the purpose of estate taxes after their death. That may benefit their own heirs.
DISCLOSURE
SRS Wealth Management, LLC does not offer tax planning or legal services but may provide references to tax services or legal providers. SRS Wealth Management, LLC may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters
SOURCE
Advisory services offered through SRS Wealth Management, LLC, a Registered Investment Advisor in the State of California. Insurance products and services are offered through Successful Solutions, LLC, (License#: 0D73873) an affiliated company. SRS Wealth Management, LLC and Successful Solutions, LLC are not affiliated with or endorsed by the Social Security Administration or any government agency. Our outgoing and incoming emails are electronically archived and subject to review and/or disclosure to someone other than the recipient. We cannot accept requests for securities transactions or other similar instructions through email. We
cannot ensure the security of information e-mailed over the Internet, so you should be careful when transmitting
confidential information such as account numbers and security holdings. If the reader of this message is not the intended recipient, or an employee or agent responsible for delivering this message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by replying to this message and deleting it from your computer.
