Ep. 27 - Tax Advantaged Gifting to Minors
Want to maximize your wealth while securing your children’s future? Tune in to this episode of the Good Steward Law and Wealth Podcast with host Ledly Jennings to explore innovative wealth management strategies for a secure financial future gifting to minors through your estate plan. Discover how tools like UTMA accounts, 529 accounts, and trusts can help you provide for future generations while maximizing tax benefits. Whether you're planning for education or long-term security, this episode offers practical advice on how to make every dollar count.
IN THIS EPISODE:
- (00:30) Ways of gifting to minor children with a UTMA through your estate plan
- (05:25) Setting up a 529 Account to use for education - a no-risk account
- (08:59) Set up a trust in combination with a 529 Account
- (11:31) Different ways to have income tax benefits
KEY TAKEAWAYS:
- One of the most effective ways of gifting money to minors is through accounts like a UTMA Account (Uniform Transfers to Minors Act). These accounts allow you to gift money to children but retain control until they reach a certain age (typically 18-25, depending on the state). This method helps avoid potential gift tax consequences and provides some tax benefits as the money grows.
- A 529 account is a highly beneficial tax-advantaged way to save for a child's education. Contributions to these accounts are tax-deductible in many states, and the money grows tax-free. Additionally, if the child doesn't need the money for education, it can be rolled over into a Roth IRA, providing future retirement benefits.
- Setting up a trust in your estate plan can be a great way to protect and manage assets for children, ensuring that money is distributed responsibly and protected from creditors, divorce, and other risks. Combining a trust with a 529 plan can offer flexibility and security, with the trust managing the 529 account and ensuring generational succession for education funds.
RESOURCES:
Info@ljenningslaw.com - Email
ABOUT THE HOST:
Attorney Ledly Jennings, founder of L. Jennings Law, specializes in protecting legacies and ensuring smooth transitions of personal and business assets. With offices in Arkansas, his firm offers expertise in estate planning, elder law, probate, and business planning. With a J.D. and MBA, plus valuable experience at Stephens, Inc., the state's largest investment bank, Ledly serves high-net-worth clients and family businesses statewide.
Transcript
GSLAW-Ep. 27 Tax Advantaged Gifting to Minors-Audio Transcript
[:[00:00:25] Ledly Jennings: Welcome back to The Good Steward Law and Wealth podcast. Glad to have everyone here today. And today we're gonna talk about planning and gifting to minor children and how are the best and most effective ways to do that, especially within your estate plan. Um, we'll kind of think on, uh, this, um. Brought up a story when you know, kids and various things lose their teeth.
[:[00:01:10] They want to provide for them, maybe set up accounts for them. Um, but they don't want to give this money or any money to their kids when they're young and underage. They wanna make sure it's given to them in a responsible manner. And what a lot of my clients want to do is they wanna do it in a way that helps 'em with taxes as well.
[:[00:01:51] Um, well that's what we're gonna talk about today. So one of the common methods that you may have heard of is A-U-T-M-A account. [00:02:00] Um, I think that stands for a Uniform Minor Trust Act. It was an act that was passed, um, that allowed the creation of accounts. Basically, it's like an investment account that you can put money into until the child turns 18.
[:[00:02:38] It's still managed by you or whoever you name until they're 21. Even some states make that age go until they're 25. So that's why a lot of people like these accounts 'cause they can gift to it. And, um. Not relinquish control to their kids while they're young and potentially irresponsible. Um, so why do they, why do you even bother setting up [00:03:00] these accounts?
[:[00:03:24] Um, and just as a reminder, we've, we did episodes on tax and gifting, but the way the law sits right now is you can gift $19,000 to any individual and without a gift tax. Um, and if you're married, you double that number, so $38,000 so you and your wife could gift your kids. Kid, $38,000, each of your kids, 38 without tax consequences.
[:[00:04:17] I. Now that's the first 1,350. The second 1,350 is taxed at that child's rate. Um, and maybe if your kid's underage, they aren't making any income. So that rate very well could be zero, but anything over that, so over $2,700 would be taxed at your personal rate. So if it's an amount that's not making a bunch of income and it's under $2,700, then you can get some income tax benefits from doing that.
[:[00:04:59] [00:05:00] So they're gonna get that money that you put in there when they're 18. And the reason I don't like that is it locks us into something in the future that we can't predict. We don't know what's going to happen with our kids. Are they gonna be responsible at 18? Um, what are they gonna use it for? You know, anything could have happened in their life that makes this money not a good thing to go to them when they're 18.
[:[00:05:44] But usually each state has their own 5 29 plan, but any advisors can also create the accounts for you like Edward Jones, Ameriprise, whoever it is, Charles Schwab. They have. Uh, five 20 nines and are custodians of that. But the purpose over [00:06:00] 5 29, like I said, is to pay for education, but it's also tax advantage.
[:[00:06:31] But even then, the money grows tax free in the account and then when they take it out, use it for education. It's not taxed either. So basically it's a tax managed account similar to an HSA, um, but you have to use it for education when you take it out. Because if you don't, then there's penalties for taking it out and you have to pay the taxes on it.
[:[00:07:13] It can include, uh, supplies, like books, computers, whatever it may be. Um, it can even include, um, K through 12 tuition. So now it even covers. You know, if you go to private school, it covers school from the time you're kindergarten through high school. So if you fund a 5 29 account with enough money, it can pay for your school, for your entire kid's life.
[:[00:07:56] Well, you can roll it over one to a [00:08:00] Roth IRA, so she could take that money that she didn't use and put it in a retirement account for herself. Um, now there are limits on that. I think the number is 35,000 is the maximum you can roll over to a Roth. IRA. But say you did that, she rolled over the 35,000 to the IRA and there was still money left in there.
[:[00:08:44] Um. So that's why it's my favorite account because you get the tax advantages and there's a ton of flexibility in there. Um, now that's, so the first account that you can set up for mine is A-U-T-M-A. The second is a 5 29. The [00:09:00] third is a trust. And obviously we talk all about trust, uh, on this podcast, and that's what I am.
[:[00:09:26] And you can also put, um, age limits on when they can access money, but there's not really any tax advantages to it. Um. So within a trust, most of the trusts I draft are created from revocable trusts, and they don't come into play until the parents are gone. And what we're really talking about today is how do you provide for your kids while you're living?
[:[00:10:10] So within your trust, you've likely set up. Successor trustees that will take over if you're unable, you've set up successor beneficiaries, all that. So there's always going to be a trustee managing your trust. Meaning if that trust owns a 5 29, they can then manage the beneficiaries, managed, how the um, benefits are distributed, all that so that, you know, you set up that 5 29.
[:[00:11:00] So if I could design the perfect way for someone to leave money. To their kids or grandkids and provide for them while they're living. It would be create a revocable trust and then open a 5 29 in the name of that trust. Um, that's kind of a, a foolproof way to provide for the kids. Um, I. Always think about how do you encourage parents or grandparents to give and set up these types of accounts for kids?
[:[00:11:48] Why not pay some of that money to the kids or grandkids instead of the government? And that almost always is a way to encourage people to set up five 20 nines. 'cause they're gonna pay the money [00:12:00] somewhere one way or the other. Why not? To their kids and grandkids education. Um, the other thing is estate tax.
[:[00:12:26] Um, right now the exemption is as high as it's ever been, but, you know, 20 years ago, I think it was as low as $300,000. So people did have an estate tax issue, and one way to solve for the estate tax is to make gifts during your lifetime to lessen your net worth. And get those that assets out of your name essentially.
[:[00:13:10] And I, I usually encourage clients if they have extra money, gift all the way up to the maximum gift tax exclusion into these 5 29 accounts, which is, like I said, 19,000 per year per individual. Um, and even if you go over that in any given year, then there still may be no gift tax owed because it comes off your lifetime exemption, which is that same $13.9 million number.
[:[00:13:56] Estate planning is when done holistically. When you're thinking [00:14:00] about gifts, you're thinking about financial planning, but you're also thinking about succession and providing for the next generation. And we always say do it in a tax efficient manner. 'cause that's what being a good steward of our wealth is.
[:[00:14:28] Narrator: Thank you for tuning in to the Good Steward Law and Wealth podcast. If you're ready to take control of your financial future, visit good steward firm.com to book a meeting and sign up for our newsletter.
