It’s the season of gifts again. What if you chose some gifts that would literally keep giving, and keep that Santa Claus warm fuzzy feeling going for a long time?
Accounts for Children and Teens
For children or teens, don’t forget the college savings accounts that you as a parent or grandparent can set up. Consider the tax and financial aid treatment of each type of account before settling in on strategy for contributing on a one time or continuing basis. While a 529 account can be tax free if the holder withdraws for qualified education purposes, other accounts can be considered as financial assets available to the child for covering educational fees and tuition fees once accepted to college. (For related reading, see: Choosing the Right 529 Education Savings Plan.)
Delaying a custodial account’s inheritance until age 21 from the usual 18 years of age may help but many young adults may still be in college at that age. Custodial accounts, however, can hold a variety of assets and are not limited to mutual funds as a college 529 account is.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts can serve as a poor man’s trust, and hold title to assets in the name of a child until the age of majority. The UTMA account differs from the UGMA account in that it can hold title to non-bank assets as well, such as real estate. This may be a consideration as minors cannot inherit directly. A trust or UTMA account can hold assets on the child’s behalf that are managed by the named custodian or guardian until the child matures. Families with assets should think about how these can be protected for children if the parents pass away before the children attain the age of majority.
Termination age may vary from one state to another but generally, for the UGMA trust, the termination age is 18 years, while for the UTMA trust the termination age is 21. Depending on the state, assets in UTMA accounts can be held for up to 25 years, allowing parent more control over the timing for turning over the assets to their child. Unlike a college 529 account, a UTMA or UGMA account is not transferable to another child.
Custodial accounts can be established at a bank, mutual fund company or brokerage services company, as well as directly with a trust company serving the shareholders of a specific corporation. Direct investment programs allow incremental month by month purchase of blocks of stock using checking account withdrawals and allow the giver to literally give monthly to accumulate shares in a variety of dividend-paying companies. The dividends are reinvested to accumulate even more shares during the holding period and fees are usually quite low. The one downside is that concentration in a single company stock can be subject to wider swings than the general stock market. (For more, see: A Closer Look at Custodial Accounts.)
If you decide to investigate direct investment one idea may be to choose companies that your children or grandchildren understand, such as major consumer brands which the child has experience with. In this way, children learn early on about investing, assets and the possibilities for dividends and growth. The account becomes theirs at the designated age of majority.
Check with your tax advisor about taxation of the account and the dividend income and the effect on your returns. There is a deduction available to the child for the first $2,100 or so of unearned income. The amount received thereafter can be taxed at the child’s rate or the adult’s rate, depending on the age of the child. For more information on taxes visit this page of the IRS' web site.
When thinking about gifts to charities many people like the idea that their gifts continue to give over time. For instance, a gift to Heifer International can buy goats, cows, chickens, ducks, honeybees and many other animals that procreate. Heifer donates these animals to farm families in underdeveloped countries who in turn can manage their animals to create income for their families.
Donor advised funds are another way of giving and you decide the frequency of distributions. Your local community foundation, a 501(c)(3) nonprofit organization, is a resource. These foundations support a variety of local nonprofits and create pools of donor funds for quarterly or annual distributions. Better yet, you may get a gift back in the form of a tax deduction for amounts you initially gift to the community organization. It’s worth a conversation and you may like to involve your children or grandchildren in the process to learn about the importance of giving during one’s lifetime. The community foundation can also advise you about the tax benefits of donating appreciated stock to support the donor fund or other charitable goals.
End of the year tax planning is paramount. Many changes to the tax code are before our current seated Congressional delegations. Many of these changes could take effect in the new year. Luckily charitable deductions don’t yet seem to be on the chopping block. They can be useful in managing your overall tax liability for this year when filing in 2018. (For more from this author, see: Putting Your Money to Work for the Greater Good.)