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8 Ways To Make Financial Gifts 8 Ways To Make Financial Gifts
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8 Ways To Make Financial Gifts

Insights & Ideas Team •  December 3, 2014 | Your Finances

It’s that time of year and you’re thinking of gifts for your family, but maybe you want to give something more than this year’s latest gadget—something that will help them financially. While some people might give gift cards, you might be looking for more significant ways to help your loved ones secure a better financial future.

“There are a number of ways to give financial gifts,” says Ken Elbert, director of advanced planning at Northwestern Mutual. “Financial gifts can help with many things, such as paying for college, buying a house, starting a business, purchasing insurance or building savings.”

What Are the Options?

There are many financial gifts you can give to loved ones depending on what you want to accomplish, and each comes with its own opportunities and nuances. It’s important to think about all aspects of giving. “Tax implications are something to consider, but first focus on the purpose of the gift and the capacity of the recipient,” advises Elbert. For instance, “If a grandparent wants to help with a grandchild’s education but is concerned that the grandchild could spend a cash gift on other things, the gift can be made in a way that ensures the grandchild will use the money only for education.”

Types of Financial Gifts

1. Cash gifts. This is the most direct method of giving. You can write a check to your loved one to use as he or she wishes. Or the check can be made directly to an educational institution or medical provider.

2. Stocks, bonds, mutual funds. Giving stocks, bonds or mutual funds provides an opportunity for the recipient to learn investment skills and creates the potential for growth.

3. Retirement accounts. IRAs or Roth IRAs can be established for loved ones if they have earned sufficient income that year. These can be useful to help save for retirement. It may also be possible to withdraw funds early for certain expenses like educational spending or a qualified first home purchase.

4. Life insurance. It is possible to buy a life insurance policy for a loved one. Purchasing a policy for a younger person generally results in lower premiums and avoids the possibility that future health changes could make insurance unavailable. In addition to the death benefit, any cash value in a policy can be used for lifetime needs.

5. Property. You can give away property, such as a home, car, stamp collection, or family heirloom. In addition to the monetary value, certain property has an emotional connection, which may be a significant part of the gift.

6. Education savings. There are several ways you can help with educational needs, including the following:

  • 529 plans,which are generally for college expenses. The assets can grow tax deferred, and withdrawals are exempt from federal taxes if used for approved higher-education expenses.
  • Coverdell Education Expense Accounts, which generally can be used for education expenses at all ages from K-12th grade as well as for college. These are limited to a $2,000 contribution per year.

7. Trusts. Trusts can be created to hold assets like cash, stocks, bonds, real estate or life insurance. The creator of the trust decides who will oversee the trust and how trust assets will be distributed.

8. Uniform transfer to minor accounts. UTMAs are accounts that can be set up for a minor. They can hold assets such as savings accounts, stocks, bonds, life insurance, etc. The accounts are administered by a custodian, which can be the giver, until the minor reaches age 18-21 depending on state law.

Gift Tax Issues

Making financial gifts involves thinking about the tax implications. It is the giver, not the recipient, who is responsible for any gift taxes, but only beyond certain amounts. Gifts up to the annual exclusion amount ($14,000 in 2014) can be made each year to any person without incurring any gift tax. In addition, each person has a lifetime gift-tax exemption, which is $5.34 million in 2014. These amounts are indexed for inflation and allow for individuals to make substantial gifts without paying any gift tax. Each parent has an annual exclusion, so together a couple can give $28,000 to any child each year. Also, five years of annual exclusions can be used for one-time gifts to 529 accounts. Gifts directly to a college for tuition or to a medical provider for medical expenses don’t count against these limits.

Giving financial gifts to loved ones can ensure greater opportunity and security down the road. The key to giving the right gift is understanding your options to be sure your generosity pays off for both you and the recipient in years to come.

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