As children grow into adults, we miss seeing the excited surprise on their faces as they open presents. A child of 5 just has such a glee when receiving a gift. It is still possible to give your adult child something they will appreciate.
Most parents with the ability to give money to their adult children plan to do just that. But it’s not only the tax implications of gifting that parents must consider before writing a check or creating a trust.
The timing, amount and method of gifting to adult children can have long-term effects on a family’s dynamic and an adult child’s future.
While gifting is a generous gesture, it can also spell disaster for parents’ own finances and retirement plans if not thoughtfully considered. Adding to the complexity of lifetime gifting and inheritance planning are ever-changing tax and estate laws which could turn even the best of plans into costly burdens for parents and children alike.
In Y 2021, parents can each take advantage of their annual gift tax exclusion of $15,000/yr, per child. In a family of 2 parents and 2 children, this means the parents could together give each child $30,000 for a total of $60,000 in Y 2021 without filing a gift tax return.
If the same family were to give beyond this exclusion amount, the parents would need to file a gift tax return and use a portion of their lifetime gift tax exemption, which currently sits at $11.7-M and is subject to change. Thank can mean big problems.
LTN economist and tax expert Bruce WD Barren notes that a Key tool that the wealth advisors to the rich deploy is a dynasty trust. A dynasty trust is a form of trust that is designed to sequester wealth for longer than ordinary trusts sometimes for centuries or forever. They are often formed in US states, such as South Dakota, that have suspended or altered their state “rule against perpetuities,” legislation that previously limited the lifespan of a trust.
Decisions around when and how to give may best start with a clear look at parents’ current financial situation.
A 2018 Merrill survey found that 79% of parents support their adult children, which might include covering cellphone bills, higher education costs, down payments on a 1st home and wedding costs.
While common, supporting and giving money to adult children can come at the detriment to parents’ retirement plans, particularly if unexpected emergency or medical costs arise.
Make sure you are not depleting your assets to the point of suffering or risking your money, giving it all away so that you has nothing to live on. As your children may not be there for you.
Have a prosperous day, Keep the Faith!