Financially Sound Ways to Give to Minors

There are many options for helping a child secure his or her financial future.

One of the best presents you can give a grandchild is the gift of a secure future. Money you give them when they are young will grow, increase in value and be used for a variety of purposes. Going to college, buying a car or home, taking a trip around the world or starting a business are just a few. Remember, once you give a monetary gift, the money is the recipient’s to spend as they choose — although you can delay granting access until they’re an adult.

If you want to help your grandchildren financially, here are some options:

Financial Security Now

• Cash – You can give someone $14,000 a year without having to pay a gift tax or report the gift to the Internal Revenue Service. If you and your spouse both decide to give a cash gift, the total amount can be as high as $28,000 a year. Be aware that it’s a lot of money for someone younger than 18 to manage. One option is to put the money in a custodial account and appoint someone to manage the money. While the child’s parent may be the logical choice, that person might not be the best money manager. Also, when your grandchild is 18, they can spend the money any way they like. To make sure you are not paying more taxes than you need to on a gift, be sure to talk to a tax advisor before making any decisions.

Financial Security Later

• Savings Bonds – When you purchase a savings bond as a gift, you are loaning the U.S. government money from one to 30 years. Bonds can be redeemed for face value after a year, but the longer they are held, the more interest they will earn. Savings bonds are not as popular as they once were because of poor performance due to low interest rates, but they still can be a sound financial gift. You can put the bond in your grandchild’s name; and, if your grandchild uses the money for qualified education expenses, they may be able to get some tax benefits. Savings bonds are available as Series EE or Series I bonds. Both accrue interest monthly and compound interest semiannually. The difference between the two is that Series EE bonds earn a fixed rate of interest and are guaranteed to double in value from their issue price no later than 20 years after their issue date. The interest rate of Series I bonds is based on both a fixed rate of return and a variable semiannual rate, indexed for inflation. There is an annual limit on how many savings bonds you can purchase — a combined $10,000 in Series EE electronic bonds; $10,000 in Series I electronic bonds; and $5,000 in paper Series I bonds.


• Stocks – If you already own stock that has appreciated and you give it as a gift to your grandchild, they will not have to pay as much tax on the capital gains. You also can buy shares directly, through a custodial account at a brokerage house, or online.

For An Education

A College Board survey of tuition and fees for the 2016-2017 school year shows that the average annual cost of a private college is $33,480; $9,650 for state residents at public colleges; and $24,930 for out-of-state residents attending public universities. These numbers don’t include room and board or books. With costs expected to increase two times the rate of inflation each year, in-state public college could run more than $13,900 in 10 years.

Another way to help your grandchild: earmark funds for college and limit your tax liability by setting up a tax advantaged, state-sponsored 529 College Savings Plan or a 529 Prepaid Tuition Plan:

 

• 529 Savings Plans – This plan is similar to a 401K or IRA because contributions are invested in mutual funds or other investment products. The owner of the fund is the parent or grandparent, but the child is the beneficiary and can take money out tax free for certain higher education expenses.


• 529 Prepaid Tuition Plans – You can lock in today’s tuition rate by pre-paying tuition at a higher education institution. If your grandchild decides to attend an out-of-state or private college or university, you can set aside an equal amount of money for that option instead.

If one of your grandchildren decides they don’t want to go to college, the funds in the 529 plan can be switched to a different child. For more information on how to make a financial gift to a minor, contact your local Alera Group advisor.