Q: How can I gift assets to my children without a tax penalty?
A: There are a number of ways to gift assets to your children during your lifetime. The first thing you should do is examine your motive. Are you primarily looking to provide for your child's education? Are you looking to provide a small nest egg when they begin their married life?
If education is your sole motive, you might consider a Coverdell education account. These allow you to gift up to $2,000 per year to each of your children. By doing this, you are effectively removing these assets from your estate, as well as the earnings generated within these accounts. An additional benefit of a Coverdell account is that it allows you to change the beneficiary if a child does not need the funds. Keep in mind that Coverdell accounts can be used only for the reimbursement of education related expenses.
If you are looking for something that allows for other types of expenses, you might consider a Uniform Transfers to Minors Act account. This account allows you to gift up to the annual gift tax exclusion, currently $13,000 for an individual and $26,000 for a married couple.
This type of gifting also removes assets from your estate; provided however that you are not the trustee. Once the assets are in this account, they are the owned by the beneficiary. In other words, you cannot take the gift back or change the beneficiary.
However, it can be used for all expenses attributable to the "use and benefit of the minor."
You could also do a combination of the Coverdell and the UTMA. There are a number of ways to address different goals related to gifting to children, and should be a part of your comprehensive financial plan. What works for one person may not for another,
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. John C. DeMoss, CFA, serves as president of DeMoss Capital. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.