This is the first post in a 3-part series in partnership with Bridget Wyatt and Lindsay Sabel of Merrill Lynch Wealth Management.
Now that you’ve achieved financial security for your family, you might be asking yourself, What’s the smartest way to share this success with my children? From annual exclusion gifts to trust structures, you have options for tax-efficient ways to transfer wealth to your children while they’re young. To explore these strategies, we sat down with Bridget Wyatt and Lindsay Sabel from Merrill Lynch Wealth Management.
First Things First
First, it’s important to understand and prioritize your savings before exploring gifting strategies. Bridget says her team likes to think about savings in buckets that need to be filled, starting with maxing out your retirement savings. “We have seen firsthand the power of starting this as early as possible so that the money set aside for retirement starts compounding and building within that tax-free retirement structure of a 401k, IRA, SEP, 403b, etc.”
If you’ve done that and have worked to create a plan, or what Lindsay calls a “wealth outlook,” you can then understand where you are in the lifecycle of saving, These savings aren’t just for retirement, she says, “but for paying for education, caring for family members that may need your help, and of course the goals that are a bit more fun like buying a vacation home or taking a big trip.”
Once you’re confident about meeting those financial milestones, you can explore efficient gifting strategies for your children (and charities, etc.).
Bridget Wyatt and Lindsay Sabel of Merrill Lynch Wealth Management
Gifting Strategies
Here, Bridget and Lindsay break down the three most common types of gifting strategies for families.
Annual Exclusion Gifts: As it relates to children specifically, annual exclusion gifts can offer significant tax savings. You can give away up to $19,000 (or up to $38,000 if your spouse agrees to split the gift) to as many recipients as you want, without being subject to federal gift tax. To the extent the annual exclusion for any year is not used, it is lost and does not carry over to the next year. However, a new annual exclusion will be available for the next year.
Custodial Accounts: Gifting can be done into custodial accounts which will become the property of the minor at age 18 or 21, depending on state law. If the custodian is the minor’s parent, this could cause the property to be included in the custodian/parent’s estate if the custodian/parent dies before the custodial account is fully distributed or expended.
Trusts: Gifting into a trust structure would not be a gift of a “present interest” (and would not qualify for the $19,000 annual exclusion) unless the trust is either a 2503(c) trust or a “Crummey” trust. This is a trust for any beneficiary, whether a minor or an adult, that allows the beneficiary to withdraw contributions to the trust for a limited period of time.
Read more financial planning content from Bridget Wyatt and Lindsay Sabel of Merrill Lynch Wealth Management:
Should You Open a Custodial Account, 529, or Trust for Your Kids?
How to Safeguard Your Children’s Inheritance
