One of the great joys of having worked and saved for most of your adult life is the ability to share your bounty with the people you love, including children and grandchildren. If some of those loved ones are minors, you may be wondering about the wisest way to make those gifts.
Of course, you could always choose to leave assets to your loved ones after your death through your estate plan. Since that day is hopefully far off, that might eliminate the problem of at least some of the recipients being minors. But there are also many reasons you might want to make gifts to minors during your lifetime.
Lifetime gifting means that you have the joy of helping your loved ones when they may need it most. You will get to witness their enjoyment and experience their gratitude, rather than just imagining it. If the minors in question are your grandchildren, you are not just helping them, of course; you are lifting a financial burden from the shoulders of your children. If your children are struggling financially, making a gift that benefits their children can be a lifeline to the whole family. If your children are doing well, your gift can still benefit them, by allowing them to preserve and invest their own assets for the future.
What’s more, you will be able to have a hand in helping them learn to manage assets, especially if further gifts or bequests lie ahead. If you have concerns about how they handle early gifts, you then have the opportunity to make some decisions about how you choose to structure further ones.
Making lifetime gifts to younger relatives may have more practical benefits for you, as well. Strategic gifting can allow you to remove appreciation from your estate and reduce your taxable estate. Making gifts during your lifetime also allows transfer assets on a tax-exclusive basis. While estate tax is based on the total value of the estate, including the funds used to pay the tax, gift tax is based only on the value received by the person receiving the assets, so it is considered “tax-exclusive.” Therefore, taxes on gifts made during your lifetime are often less costly from a tax standpoint than those made at death. (Of course, this assumes that those gifts would be subject to estate tax.)
There are a number of reasons it may be appealing to make lifetime gifts to minor children and grandchildren. It is important to also take a look at the other side of the coin: the risks inherent in making those gifts.
It’s likely that one of those potential downsides has already occurred to you. Every parent or grandparent of means, especially one who worked hard for their money, worries about the effect of a large gift or inheritance on the beneficiary. Money opens doors, of course: it can make it possible for a child to attend a great university without crippling debt, broaden their horizons through travel, or pursue meaningful work without worrying about what it pays.
But it can also lead to a feeling of entitlement, a lack of motivation, and the discouragement of productivity in the recipient. If you are troubled by the prospect of your grandchildren morphing into lazy, entitled trust-fund babies or squandering their wealth, you may be hesitant to give them money so early in life.
Your adult children also may not welcome a generous gift to their children, if it means the money gives the children financial independence from their parents (and reduces the parents’ ability to control or influence their children). The gift might also have the unintended consequence of reducing the children’s eligibility for financial aid for college.
There are other reasons you may be reluctant to pull out your checkbook. Making a lifetime gift to a minor often means that you are giving up all control over the assets. Depending on your financial situation, you may also have a lingering worry that the gift will reduce your net worth or stream of income to the point where you are unable to maintain the lifestyle you have dreamed about for your golden years.
If you make a gift of real property, stock, or certain other assets, there is also the concern about cost basis. If your child or grandchild inherits property from you, they receive a “stepped-up” basis in the property at the time of your death. If they receive that property during your life, they lose that step up and may get hit with a higher capital gains tax on the sale of the asset.
There is another potential drawback to certain types of lifetime gifts. If you give cash or assets without taking proper asset protection measures, those assets could fall into the hands of an eventual spouse during a divorce, or be exposed to other creditors.
It is important to understand: this list of “cons” doesn’t mean that you shouldn’t make gifts to minor children or grandchildren. What it does mean is that you need to consider your goals for a lifetime gift, and what steps you need to take to prevent the risks detailed above from materializing.
Our next blog post will discuss some of the many options available to you for making a lifetime gift to a minor child or grandchild. If you’d like to learn more in the meantime, feel free to contact our law office to schedule a consultation.