Financial Planners: 8 Ways To Give Money To Your Kids Without Paying Taxes
It’s natural for parents to want to leave a legacy for their children after they pass away, but what about if you want to support your kids in some way while you’re still alive?
Whether you want to give a cash gift to support a child’s wedding, college or just help them out financially, giving cash to kids can result in steep tax consequences if you’re not careful.
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Experts explain eight ways to give money to your kids without paying taxes — you or them — on this money.
Cash Gift With a Limit
You actually can give cash to your kids every year without tax consequences, with a limit, according to certified financial planner Stephen Kates, a principal financial analyst for Annuity.org. “In 2024, this limit is $18,000 per giver, meaning a married couple could give each child up to $36,000 per year without issue. This gift is received without tax implications.”
If someone wants to give a gift larger than $18,000 in a given year, you’ll be required to file a gift tax return with your taxes. “This amount over $18,000 will be marked against the lifetime federal gift limit, which currently stands at $13.61 million in 2024,” Kates explained.
Throughout the lifetime of the giver, they are able to give away this amount of money without tax implications as it corresponds to the federal exemption for estate taxes.
Learn More: IRS Increases Gift and Estate Tax Exempt Limits — Here’s How Much You Can Give Without Paying
Savings Accounts
A simple way to give a modest amount of money to children is by opening a savings account in their name, according to Gary Botwinick, an estate planning attorney and co-managing partner of Einhorn Barbarito Frost & Botwinick. “This can help teach them about saving and financial responsibility.”
529 College Savings Plans
If the goal is to save for college, Botwinick recommended a 529 college savings plan. “These plans are tax-advantaged and specifically designed for saving for education expenses. Contributions grow tax-free, and withdrawals — including gains — used for qualified education expenses are also tax-free,” he said.
However, check with your state’s rules, as state tax benefits may also apply.
Custodial Accounts (UGMA/UTMA)
For any number of reasons, a donor may wish to give funds to a child that need to be managed by a parent or other relative until the child is between the ages of 18 and 21. In this case, Botwinick recommended the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) as a great way to transfer assets to minors.
“The custodian manages the assets until the child reaches adulthood,” he explained.
It is possible for there to be misuse of such funds, so it’s important to designate a trusted person to manage them.
Trusts
If the goal is to make significantly large gifts for the benefit of a child, setting up a trust can provide more control over the assets and how they are used, Botwinick said.
He said a trust allows you to:
Specify conditions under which the funds can be accessed and used by the child
Direct when the funds will be distributed outright to the beneficiary and free of trustee control
Outline the disposition of remaining assets if the child predeceases the trust’s termination.
“These are highly customizable instruments with complex rules. Trust agreements should only be prepared by competent, experienced counsel,” he said.
Roth IRA for Kids
If the child has earned income, such as from an after-school part-time job, you can contribute to a Roth IRA on their behalf, Botwinick said.
“The money will grow tax-free, and the principal and any gain can also be withdrawn by the child tax-free at age 59 ½. This can be a powerful way to teach them about investing and help them save for retirement from an early age.”
Direct Payments for Expenses
Sometimes the simplest way to give your kids a monetary gift is to pay for things on their behalf.
“Payments made directly to an institution for a child’s benefit, like tuition or medical expenses, are not considered gifts and thus are not subject to gift tax limitations,” Botwinick said.
Transfer of Appreciated Securities
Another potentially more effective way to use the annual gift exclusion is to transfer appreciated securities to a child vs. providing a cash gift, according to Ryan Nelson, CPA, CFP, a wealth advisor and founder of RLN Wealth.
“With this strategy, the giver avoids capital gains taxes on the unrealized appreciation, and the child may be able to immediately liquidate the position and pay 0% capital gains tax — assuming their income falls within the lowest capital gains tax bracket,” Nelson explained.
It’s important to note that this strategy is most effective when gifting to younger, independent adult children with modest income profiles, since they won’t have exposure to the ‘kiddie tax,’ he said.
Ultimately, thoughtful planning and consultation with financial and legal professionals can ensure that the gifts not only provide immediate joy and support but also lay a strong foundation for the child’s financial independence and success in the future.
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This article originally appeared on GOBankingRates.com: Financial Planners: 8 Ways To Give Money To Your Kids Without Paying Taxes
