Articles Posted in Gifts

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college quad
As the season turns and it starts to feel like Fall, many parents are either paying college tuition bills or worrying about paying them. Many of my clients have asked me how 529 college savings plans or custodial accounts are counted when colleges consider financial aid.

Here are the basic rules and a few strategic ways to use them.

Student’s assets are counted more heavily than parents’ assets by colleges. When a school analyzes family finances using the Free Application for Federal Student Aid (FAFSA), which most schools do, they count parental assets differently than those owned by students when they calculate how much a family should contribute towards college costs. When the schools calculate the Expected Family Contribution (EFC), they expect parents to contribute no more than 5.64% of their assets. But a student is expected to contribute 20% of their assets. That means that if a student is considered the owner of an asset, a school will expect that student to use more of it to pay for school than they would expect from a parent that owns the same amount of assets. So, any asset a student owns will reduce available financial aid more than any asset a parent owns.

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piggy bankCustodial accounts are an easy way to hold money for a minor child’s benefit. They have many advantages.  They’re free-it’s easy to open up a custodial account at any bank or financial services company.  (You’ll know if an account is custodial in California because it will say “CUTMA” on the statement, which stands for California Uniform Transfers to Minors Act.)

They’re simple-a custodial account can hold cash, or other assets, for the benefit of a minor until a certain age (in California, until age 21 if the account is established during life; 25 if created by a Will or a trust after a death). They work as intended – when the property is transferred to the CUTMA account, the child becomes the legal owner, but has no control over the money until the account ends, when they are old enough, presumably, to properly manage it. Until that time, the account’s custodian can use the money for that child’s benefit.

But what do you do if they get too big? I’ve had more than one client come into my office terrified because their children are going to inherit hundreds of thousands of dollars way before their parents think that would be a good idea. Some of you are, no doubt, rolling your eyes in mock horror, but this can be a source of great stress for parents. Imagine, for example, that a well-meaning grandparent bought Pretend Co. stock when it was at $7/share (in 2002) and gave 2000 shares of stock to a custodial account for your child. Fourteen years later, that stock is now worth $104/share and worth $208,000! And your adorable child is now a goofy 17 year old, interested more in texting, dating, and driving than careful investing.

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gift2Recently, a client of mine asked me how to set up a trust to hold gifts to their children that those children wouldn’t be able to use for about twenty more years. This can be done by use of what’s called a “Crummey” Trust (named after the attorney who invented the technique).

This kind of trust is usually funded with annual gifts. Currently, you are allowed to give $14,000 per year to any one person without having to report the gift on a gift tax return or use any of your lifetime exclusion from the gift and estate tax (currently $5.43 million per person). A Crummey Trust allows you to make such annual gifts, but keep those gifts in trust for years. The gift counts as being made in the year of the gift, even though the beneficiary has no control over the money until the trust ends. Other people, like grandparents, can also make contributions to this kind of trust.

Why would you want to do this? The first reason is control: if your children are currently minors (let’s say, middle schoolers), you probably don’t want to just put $14,000 into their bank accounts each year, unless you are extremely relaxed about the choices they’d likely make with that kind of annual bonanza (or want to support GameStop). You’d much rather put that money into a trust that’s managed for your children until they grow up to an age where they’re likely to use the money more wisely. Since you are setting up the trust, you can have control over what the trust’s assets can be used for, too — maybe it’s just for the purchase of a house, or maybe just to pay for graduate school, or a wedding.

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nostalgia-499988_640Estate planning is often motivated by the big things. I’m not getting philosophical here. Forget about life and death. On a practical level, what brings families into my office are often the big financial assets–the house, the brokerage accounts, the retirement assets, and a concern that these assets be shared equitably by loved ones. And I, like most estate planners, do my best to write trusts and Wills that do just that.

But, often, it is the little things that can become contentious after a parent dies. From Dad’s stamp collection, to (I kid you not) a parent’s lawnmower, I’ve seen families fight over things that weren’t even on their loved one’s radar when the estate plan was written. Somehow these physical object (in legalese this stuff is known as ‘tangible personal property’) can become the locus of much hurt feeling and much passion, seemingly to become imbued with a deceased person’s essence, or to evoke their memories in a way that money cannot.

Often, fights over tangible personal items becomes especially fraught when there are multiple marriages, with a surviving spouse and children of prior marriages sparring over a loved one’s personal items. I’ve been thinking of this a lot lately because of Robin Williams.  Less than six months after his death, his third wife and his children from his first and second marriages are involved in litigation over alleged ambiguities in what seems, from a distance, to be a well-drafted and thoughtful estate plan. As reported in the New York Times, here’s some of what they are fighting about:

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giveAs 2014 draws to a close, many of our clients are thinking about making annual gifts to charities. The IRS has just posted a handy article with six tips to keep in mind to make sure that you can claim an income tax deduction for the gift. Here’s a summary:

1. Qualified charities. Make sure that you are making a donation to a qualified charity. The IRS offers a tool to make sure that your intended recipient is qualified. Donations to churches, synagogues, temples, mosques, and government agencies are also deductible, even if they’re not listed.

2. Monetary donations. If you want to give a charity money, in cash, or by check, electronic funds transfer, or credit card, you must have a bank record (like a cancelled check) or a written statement from the charity to deduct the gift.

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Money in handI recently read an article about the value of giving your children (or grandchildren) the gift of compound interest and a more secure retirement, in the form of an annual contribution to their Roth IRA. What a great idea!

The author’s point is that many young people are struggling to pay off their educational debt and mortgages, or cope with the costs of child-care. But that, of course, is the best time to start saving money towards retirement, since money invested early has more time to grow.  Studies recommend saving between 15% and 17% of your earnings each year towards retirement — but many young people just can’t save anywhere near that amount at the beginning of their careers.

His solution: consider giving children and grandchildren a gift of $5500/year for deposit into a Roth IRA.

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Young kidOne of the things that I love about my job is helping people with real-world, actual, legal issues. And one that comes up often is parents, or grandparents, asking me how to name their young children, or grandchildren, as beneficiaries for their retirement accounts, life insurance, or payable on death accounts.

Here’s the short answer: Don’t. At least don’t name your minor child/grandchild directly. If you name a minor child directly as the beneficiary for an asset that’s worth more than $5,000, that child will not be able to inherit it without some form of adult supervision because minors are not allowed to own property in their own name that exceeds that limit.

Instead, unless you name an adult as custodian or a trust to manage that property, you will have to get court approval to release those assets to the child. Unless the total amount of the property is $20,000 or less, a Property Guardian will have to be appointed by the court. This Property Guardian will be responsible for managing those assets for the child until that child becomes a legal adult.  If the total falls below that $20,000 limit, the court has discretion to order you to hold the money in the way most beneficial for that child.

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treasure-160004_150Today, I was reading a trust written in the late 1990’s. In it, the Grantor made a gift to her grandchildren that was to be equal to the Generation Skipping Transfer (GST) tax exemption. This is the amount of money that a person can give to someone, like a grandchild, who is more than 37.5 years younger than the donor, without having to pay a separate tax that is equal to the maximum gift/estate tax, or 40%, on the transfer.

Back then, that GST exemption was a bit more than $1 million. So, my client was making a gift to her three grandchildren of $1 million, divided into equal thirds. So far, so good.

Skip ahead to today. The current GST exemption is $5.34 million! Suddenly a generous gift from grandmother would give everything to the grandchildren, and nothing to my client’s two sons. This is not what my client intended to do.

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gift.jpgAs of 2013, the annual gift tax exclusion amount is $14,000. That means that you can give up to $14,000 per year to any one person without having to report that gift on a gift tax return by April of the year following the gift. But that gift has to be completed–if you write someone a check, they have to cash it. If they don’t have use of the money in 2013, that’s not going to qualify as an “annual gift.”

But what if you want to give an annual gift to your five year old? You don’t really want to give her the money now…..ideally, you’d like to make those annual gifts to her but keep the money in trust until she grows up, when she can spend it, you hope, responsibly. Can you do that? If you give her a gift in 2013, that she can’t spend until 2034, is that really an “annual” gift in 2013?

Yes! As a matter of fact, you can create a trust that can hold those annual gifts for years, provided that trust has what’s called “Crummey Powers” (named after the attorney who came up with the idea.) A Crummey Trust provides for something called a ‘withdrawal power.’ If your Trustee sends your daughter’s guardian (that’s you) a notice, letting you know that $14,000 has been deposited into her trust, and that she has thirty days to withdraw the money (or whatever your trust says, provided that it’s a reasonable amount of time to withdraw the money), but if she does not withdraw the money (which she won’t, of course) it will stay in trust until 2034, that WILL qualify as an “annual” gift.

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check.jpgAs I write this on Sunday, December 30, 2012, Congress has not yet made a deal to avoid the ‘fiscal cliff’ and the estate and gift taxes look certain to revert to their 2001 levels, at least until Congress and the President do make a deal. For those of you considering a very last minute gift, by check, before the year’s end, the check should be written, delivered, and cashed (or at the very least presented to the bank for cashing) by the recipient before the end of the year to qualify as a 2012 gift.