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Neither the House nor Senate tax plan touches the annual gift-tax exclusion, and both preserve valuable strategies for contributing educational funds.
If you are looking to pass assets on to kids and grandkids this year, consider one of the following five strategies:
You may give up to $14,000 per individual in 2017 without dipping into your lifetime gift-tax exclusion (which is currently $5.49 million).
That amount doubles if you and your spouse give together. You may also boost gifts by giving to your child (or grandchild) and his or her spouse — for a maximum of a $56,000 gift this year from a couple to a couple.
Although bestowing a large check on Christmas morning might feel festive, you risk botching your strategy if you wait until the last minute, said Jody King, vice president and director of client services at Fiduciary Trust Company.
"Handing your children checks doesn't quite do it," said King. "You need to make sure they actually cash the checks, and technically they need to clear the bank before the end of the year."
You may pay tuition bills directly even if you're also maxing out your annual gift exclusion, said Suzanne Shier, chief tax strategist for Northern Trust Wealth Management. Neither the House nor Senate tax plan alters this strategy.
"Anyone can do that for any beneficiary, at any dollar amount, for any level of education," said Shier.
However, you can't make the check out to your grandkid, and you can't cover room and board or other nontuition expenses under this strategy, she said.
"A reimbursement won't qualify for this," Shier said. "Get that bill and pay that directly, and limit your payment to the tuition amount."
Both tax plans preserve the benefits of 529 accounts and would allow at least some funds from the accounts to be used not only for higher education expenses but also for K-through-12 expenses, said Shier.
Parents and grandparents may also front-load 529 contributions by socking away five years' worth of gifts at once — for as much as a $140,000 contribution this year from a married couple, Shier said.
"Particularly for grandparents, that is a means we see to really set aside a substantial nest egg for college," she said.
In some cases, grandparents should consider opening their own 529 account – and naming their grandchild the account beneficiary – either as an alternative or in addition to contributing to an account owned by the grandchild's parents, said King.
If Grandma lives in a different state than her kids and grandkids, she might get a tax break by opening an account in her own state. And if the funds in Grandma's account aren't used until the grandchild's senior year of college, they won't get factored in to any financial aid calculations, King said.
If you plan to gift stocks, this may be the year to do it.
The Senate bill would dictate a first-in, first-out treatment when determining the cost basis of gifted securities, said Pam Lucina, executive director of advice, planning and fiduciary services for BNY Mellon Wealth Management. But this year, donors may still choose whether to use earlier or later-purchased shares, giving them more control over the size of the tax bill the recipient ultimately pays, she said.
Although donors often prefer to give high-basis stock — reducing an adult child's ultimate tax bill — it can be a bigger financial win for the family to give low-basis stock if the child will pay a lower capital-gains rate when selling the shares, said Gary Schatsky, president of ObjectiveAdvice.com. Neither tax bill alters the lowest long-term capital gains rate of zero percent.
Establishing a trust might be the right move for your family if you're able to max out your annual gift exclusion every year, said King.
The main benefit, compared with a 529 account or custodial account, is that the donor holds greater control and can specify what the funds may be used for and at what age the child gains control over assets, said Lucina.
"Gift trusts have a lot more flexibility," she said. "Many families choose trusts because they can dictate a broader or more restrictive use of the assets, and can keep them out of the children's control for much longer."
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