The Most Tax Efficient Ways to Gift Cash and Assets

“Gifts and giving” is a very big topic and not likely to be covered well in 500 to 800 words.  So, this quarter I’ll forgo the lecture on how we all should be giving more and how charities are receiving less because of our recent economic issues.  Instead, I’ll focus a few words on non-charitable giving and give a few examples of how our clients express their love by giving to those in their lives.

We often assist with the transactions of our clients as they give or receive money or stock to or from family members.  There are several ways to give, which may depend upon the amount of gift, the control the giver intends the recipient to have over the gift, the age of the recipient, and tax related issues.  Types of accounts include 529 plans, custodial accounts, Roth or traditional IRA accounts, and individually owned accounts.  Types of assets include cash, EE Savings bonds, and stocks, bonds, mutual funds and trusts. 


One common example of giving is parents or grandparents contributing money into a well managed 529 plan for future college expenses of a child or grandchild.  A 529 plan allows gifts to be contributed and removed from the estate of the giver, yet allow the giver control over the funds until they are distributed for qualified education expenses.  The contributions grow tax free for years and, because it is an investment account, there is potential for investment returns, not just interest.   Sometimes, the beneficiary of the 529 plan doesn’t know they are the beneficiary of the very valuable gift.


Another gift we help with is the management of custodial accounts for minor children.  Contributions are made to the account for the benefit of the child.  Earnings in this account are taxed annually so speak with your tax preparer about tax consequences of this type of account.  A custodial account can contain various investments and proceeds from these investments will be used for the benefit of the child.  An advantage of this account is that the proceeds can be used for any reason for the benefit of the child.  Uses are not limited to qualified educational expenses.   This account can be used to teach an older child about investments, dividends, stock, mutual funds, etc…  When the child turns age 18 or 21, the account is then retitled to the child as the “new owner” giving him or her control of the asset.  Some clients plan to make the account balance zero by age of majority.  Other clients want a balance left as a gift for them at graduation or celebration of adulthood.  They wish to send them on their way with an investment in their future.   


Several of our clients make contributions to retirement plans for their grown children.  This is a wonderful way of transferring wealth to the next generation.  With it, the recipient is receiving a much larger future gift.  If an adult child earns $5,000 or more in a given taxable year, yet is short on cash to set aside for their retirement, a parent, relative, or anyone else, could contribute $5,000 to that recipient’s Roth or traditional IRA.  The plan works best when the recipient lets the contribution grow in a well diversified portfolio for many years.  In the case of a Roth IRA, the distributions will be tax-free.


In each of these cases, the giver must remember that the federal government does not want them to give their wealth to the next generation and avoid estate tax.  So, the IRS has given us guidelines regarding how much can be given without worrying about taxes.  In 2011, each giver can give up to $13,000 (annual gift tax exclusion amount) to each recipient without worries.  This amount is not so limiting as a couple could each give $13,000 to each of their children and grandchildren, each year.  A generous family could easily provide for college and a have a generous gift ready for that new car or whatever that new college grad hopes for within the limits of the annual gift exclusion.  Start early, give often, and let time and investment returns work for you.   Find someone to help you manage your gifts to the next generation.

About the author

Daniel Joss MBA, CFP®, RLP®

Daniel D. Joss MBA, CFP®, RLP® is a seasoned Financial Life Planning professional with over 16 years of advising clients. Dan earned a Master of Business Administration, with an emphasis in financial planning from Regent University in 1999. He has been selected more than once as Top Financial Advisor in Northern Virginia Magazine. Dan speaks regularly in various peer forums and professional organizations. He has also been quoted in various national and local print and online publications.

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