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Gifting To Your Kids: College Accounts and Beyond

At FPC, many of our clients are focused on making an impact in the lives of their loved ones. One of the biggest ways clients are positively impacting their family with their wealth is by finding unique ways to support their kids. The truth is, even if you’ve raised your kids to be responsible and hard-working, finding ways to help them find their financial footing early in their adult lives can help them to get ahead. 

This type of generosity is about so much more than just taking care of your kids. It’s about having the opportunity to leverage your wealth in a way that sets your kids and future generations up for financial success. Building generational prosperity is something that most families aspire to, but aren’t exactly sure how to achieve. Luckily, there are a few key ways you can give your kids (and grandkids) a leg up as they start their financial journey. 

529 Plans: A Tax-Efficient Way to Fund Education Costs

A great way to give to the family is by fiscally supporting a college fund. A tax-efficient way of doing that is by contributing to a 529 plan. A 529 plan is a college savings plan that is funded with after-tax financial contributions. 

Although the money used to fund a 529 plan is taxable, distributions from the 529 plan for qualified education costs are tax-free. As money in a 529 plan grows, any gains earned aren’t taxed when distributions are taken. A 529 plan can also be used to fund K-12 education expenses if private education is something you and your family are interested in pursuing.

Contributions to a 529 plan also qualify for the annual gift tax exclusion, which is $15,000 per recipient in 2020. Alternatively, you can treat a larger contribution made in one year as your “gift” for the next five years. For example, you could give up to $75,000 in a single year, and have it qualify for the gift tax exclusion for the next five years. 

With the total U.S. student debt up to $1.4 trillion, it’s becoming more and more important to help future college grads minimize the number of loans they need. A 529 plan is an excellent way to help achieve that, and give your kids and grandkids the best possible start after they graduate. 

Understanding the Gift Tax

Giving to children and grandchildren can extend beyond just contributing to their college savings account. You may be saving to help your child with their wedding, opening their business, or purchasing their first home. If you are giving this money to your children as a gift, remember that the government allows up to $15,000 gifted per year before triggering gift tax. This threshold is based on a per-person amount, meaning that both spouses, for example, could gift $15,000 each to a single recipient, increasing the total amount to $30,000. 

The gift tax exclusion means that you can gift up to $15,000 to one person, in any year, while avoiding the gift tax. If you give over that amount to one person, you’re required to file forms that disclose the sizeable gift to the IRS.

Medical Bills

Another way you can support your kids as they start building wealth is by assisting with medical bills. If you pay someone else’s medical bills directly, those funds don’t count against your annual or lifetime gift tax exclusion. 

If your kids are having kids of their own, or if they experience an unexpected medical accident, their hospital and medical bills for aftercare can rack up quickly. The average daily hospital cost is close to $5,220. Even if your children have health insurance, emergency savings, or an HSA, these expenses can be enough to set them back significantly. 

We find that our clients are able to jump in and help by paying the hospital or medical provider directly, instead of gifting cash to their kids to cover those expenses. This is the most tax-efficient way to help them cover these hefty expenses. 

Planning to Make An Impact

Your money is a tool to help you live your life the way you want. Supporting your kids and grandkids can be an important way to help you start living generously, while also building a family legacy. If supporting your kids financially is something you’re interested in exploring, open yourself up to all of the options available to you. From cash gifts to education savings, you can start planning ahead now to positively impact their lives in the future.