Many older people are watching their grown children struggling through difficult times, facing unemployment, investment losses, difficulty in keeping up with a mortgage and other issues. These parents want to help their children financially – but they want to do so in a tax-smart way that’s consistent with their overall estate plan. Here are some ideas to consider:
Annual gifts to children’s spouses:
Suppose your daughter is doing well financially, but your son has lost his job and is struggling. If you make annual gifts to your children, you could make an additional gift to your son’s wife. You can give up to $13,000 a year to the son and an additional $13,000 to his wife without incurring any gift tax consequences. One thing to consider is your daughter’s reaction. Will she be understanding, or will she think this is unfair? If you want to be completely fair to your daughter, you could increase the amount you leave to her in your will, in order to equalize the amount the children will ultimately receive. You could create a formula in your will explaining your lifetime gifts and taking them into account in your bequests.
Make your children a loan:
Another way to avoid “favoring” one child over another is to make your child a loan rather than a gift. With interest rates so low, you might be able to loan money to a child for up to nine years at as little as 2% interest without the IRS considering any of it as a gift for tax purposes.
To be completely fair, you could offer to loan money to both children. If you make a loan to your daughter and she can invest it and earn more than 2% a year, then she will benefit as well.
A loan can also be a good idea if you think there’s a chance your child will experience marital problems. While the law varies, a gift might be considered marital property subject to distribution in divorce, but a loan might not.
Pay medical bills and tuition:
You can pay your children’s family medical bills and tuition bills. As long as you make the payment directly to the school or the medical provider, and not to your children, there are no gift tax consequences, no matter how large the bill is.
Gifts to grandchildren:
You can make gifts to minor grandchildren up to $13,000 a year each, without running into the gift tax. This can be done by writing a check to a custodial account under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. One thing to keep in mind is that if you remain the custodian of the account, and you happen to die, the assets in the account will be considered part of your estate for estate tax purposes. So you might want to name someone else as the custodian.
Or – especially if you plan to make regular gifts in the future- you might want to create an irrevocable trust to receive the gifts. That way you can name a trustee (and successors) and you can assure the trust will last beyond the grandchild’s 18th or 21st birthday.
Give assets – but be careful which ones:
Even with the recent stock market tumble, some people have assets that have greatly appreciated in value. These are probably not the assets you want to give your children right now. The reason is that if the children sell those assets, their basis will be the same as your basis, and there will be a large capital gains tax to pay. It’s usually a better idea to keep these assets in your estate, since if your children inherit them at your death, they will get a “stepped up” basis and avoid any capital gains tax on the increase value during your lifetime.