5 Ways NOT to Gift to Children
5 Ways NOT to Gift to Children … and 5 Better Ideas
By DANIEL A. TIMINS, ESQ., CFP® | Law Offices of Daniel Timins
Parents who mean well sometimes put their children in a position to blow it.
Giving to children can be a weakness. We often want to help children actualize their financial goals and give them an easier life than we might have had. However, gifting to children can also be a disaster:
We all realize that many children are irresponsible with money, do not have enough life experiences yet to protect it, and are targets of those interested in getting a piece of the money you gave them.
Here are five common and less-than-ideal gifting scenarios, and suggestions you can use to protect your assets:
1. Gifting a Child a Highly Appreciated Asset
Capital gains taxes elicit less attention than income and estate taxes because they are usually assessed at a lower percentage (15% or 20% for capital gains taxes vs. 40% for estate taxes). However, if you gift assets during your life, capital gains are the taxes that require the most vigilance to avoid.
If I gift my children my old shares of ABC company stock, which I bought for $10 a share and now sells for $100 a share, my child also receives my cost basis, meaning they have a $90 per share capital gain they owe taxes on.
The Better Idea: Gift cash or stock that has minimal appreciation. If I bequeath the stock after I pass away, the cost basis is “stepped up” to the value of the stock on the date of my death, meaning they now have a $100 cost basis per share and no capital gain if they sell it immediately. Therefore, you should hold onto highly appreciated stock and bequeath it after your passing so its cost basis “steps up” upon your death.
2. Naming Children as Joint Owners on Real Estate
In many parts of the country home prices have skyrocketed: For too many children the notion of ever becoming a homeowner without some help from family members is impossible. However, the issue that caused the problem in the first place (expensive housing) now snowballs, because Mom and Dad not only have to help with a down payment, they also have to name themselves on the mortgage.
There are additional issues that arise for different people buying real estate with their children: More wealthy individuals may be depleting their gift tax exemptions and not know it, children with their own college-age kids may be hurting their financial aid opportunities if the real estate is a second residence, and younger children with uncertain job opportunities may rely on Bank of Mom & Dad to pay mortgage and real estate taxes for a long time.
The Better Idea: Carefully consider the consequences of future real estate expenses and co-signing a mortgage with your child. Lay out expectations, and have a back-up plan of your own if your child cannot find stable income to fulfill his side of the bargain.
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