What Should I Consider When Making a Financial Gift?

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Making a gift can trigger unintended consequences.

Gift giving is an important part of many occasions and celebrations.

People give presents at birthdays, weddings, milestone events, and holidays.

Although these are common times for gift giving, presents are not necessarily restricted to these occasions.

According to a recent Mondaq article titled “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider,” people give gifts to benefit others throughout their lifetimes as well as through their estate planning documents.

Making a gift can be helpful or harmful.
Any large gift you make should align with your estate planning goals.

Giving to others is a generous gesture.

Unfortunately, large gifts can trigger unintentional consequences for the giver and the recipient without strategic planning.

Making outright gifts can leave the assets vulnerable to creditors, litigation, or divorce.

By bequeathing large sums of money to minors either directly or through a custodial account like a UTMA, you may find they squander these assets when they are legally of age to own and manage them (and squander them!).

With the current annual exclusion amount for gifts set at $16,000, you could place this entire sum in a custodial account when the child is still in elementary school.

If the child turns 18 or 21 (depending on state law and whether the account is a UTMA or a UGMA), he or she will have full access to this $16,000.

There could even be more in the account if interest is earned on the original deposit or if you continued to make annual deposits each year.

You will essentially be leaving a significant financial holding to someone who likely lacks planning skills.


Better options for giving a gift exist you ask?

Fortunately, yes.

What are they?

One option is to move the funds to a 529 plan.

With a 529 plan, use of funds is limited to educational expenditures.

Other options include trusts.

With a trust, funds can be used beyond education needs.

The trustee can manage the account for the benefit of the beneficiary after the child is no longer a minor.

This protects the gift you made from being squandered by poor judgement in early adulthood.

A more specific type of trust is a Section 2503(c) Minor Trust.

A Section 2503(c) Minors Trust can be funded for minors using the annual gift exclusion.

Trust assets will be applied for the minor beneficiary.

There can only be a single beneficiary to this trust.

The beneficiary also must be under age 21.

Upon reaching his or her 21st birthday, the beneficiary can then have the ability to withdrawal assets.

Not all assets need to be withdrawn.

Any remaining assets can continue to be held by the trust.

Annual gifts can continually be made to the beneficiary.

An irrevocable gift trust (IGT) provides even greater control than an Section 2503(c) Minor Trust.

The annual gift exclusion can be used to fund this trust.

This trust is also helpful for gifts exceeding the annual exclusion.

As such, an irrevocable gift trust can help when a Gift Tax Return is necessary.

When creating an IGT, you should appoint both a trustee and an alternative trustee.

The trustee will have the ability to manage assets and distribution and does not have to terminate the trust.

It also protects against unrestricted access to principal or income.

When deciding how you would like to make a gift to your loved ones, you should discuss your goals with an experienced estate planning attorney.

In addition, you will want to discuss the ramifications regarding student loan qualification (if relevant) to any gift giving strategy with an experienced financial planner

Reference: Mondaq (March 2022) “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider”

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