The Gift of Investment Savings

November 23, 2018
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The holidays are quickly approaching. Consider celebrating the season by gifting savings investments to your young loved ones.

Cash and investment securities are always a welcome gift, especially when the purpose is as well defined as paying for college, a wedding, or a home. Intelligent gift giving maximizes tax benefits to the giver and recipient. After all, the last thing you want to gift is a tax bill to yourself.

Understand the gift tax exemption. You can give up to $15,000 ($30,000 for a couple) to any individual without triggering the annual gift tax. Gifts in excess of the annual exclusion amount will reduce the balance of your lifetime gift-tax exemption, currently $11.18 million ($22.36 million per couple), and will require you to file IRS Form 709. You will have to pay gift tax on nonexempt gifts that exceed your lifetime exclusion.1

Funding a child's college costs. Gifts to pay for someone's college tuition are exempt from federal gift tax, as long as the money goes directly to the educational institution. You can also give a five-year lump-sum gift to a Section 529 educational plan of up to five times the annual gift exclusion. For 2018, the lump sum limit is five times $15,000, or $75,000 ($150,000 for couples), and the money can be used for various eligible educational costs beyond tuition. The plan's assets grow tax-free if used for eligible educational costs.2

Trusts provide many advantages. You can contribute cash, securities, and property to a trust that benefits a loved one and shields some of your wealth from estate taxes. A trust also lets you maintain disbursement control, so its assets go only to the purposes you choose. Grandparents can use generation-skipping trusts to create potentially tax-free gifts to their grandchildren. Alternatives to trusts include Uniform Transfer to Minors Act (UTMA) accounts and joint bank or brokerage accounts with the gift recipient.3

Retirement savings considerations for you and recipient.. You can contribute directly to your loved one's traditional IRA in an amount up to the lesser of the recipient's annual earnings or $5,500. Recipients get to deduct the contribution from their taxable income and enjoy the benefits of tax-deferred growth as well. Alternatively, you can contribute after-tax money to the recipient's Roth IRA, allowing tax-free withdrawals after the account owner reaches retirement age. However, it s not a good idea to make these gifts using money from your own retirement account. First, it robs you of tax-deferred growth that cannot be replaced. Secondly, it could trigger income taxes and penalties that make the gift much costlier.

Be a savvy gift giver this holiday season. Whether you give something as simple as U.S. savings bonds or as complex as trust accounts, it makes sense to know the advantages and disadvantages. Contact me today for advice on ways to maximize the impact of your gifts. I can help you set up the right gift-giving vehicle that will pay long-term dividends to you and your loved ones.

1irs.gov, "What's New - Estate and Gift Tax", May 2018

2kiplinger.com, "Gifting College to Your Grandchildren", April 2018

3thebalance.com, "Trust Funds vs. UTMAs", September 2018

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