A common option when considering gifting beneficiaries money is to leave an inheritance after one passes, but there are other possibilities available - especially if the beneficiary is young or if there are certain areas you want to focus on, like education or home ownership - that allow for more saving opportunities.
Helping with Education Costs: 529 Savings Plan
A 529 Savings Plan, which is typically sponsored by individual states, is a “tax-advantaged savings plan which encourages saving for future education costs,” per the SEC. If you put money into a 529 plan, you won’t get a tax benefit from it immediately, but the money can be withdrawn tax-free if it’s used for education costs. That means you can use 529 funds for things such as:
- Tuition and fees (college, trade, or vocational school)
- Room and board (or off-campus housing)
- Meal plans
- Books and supplies
As of 2017, you can also use a 529 for K-12 education but we believe it has the most impact when used for post-secondary education, as it has more time to grow.
Helping with Home Ownership
All over the U.S., home prices are climbing. According to the Case-Shiller index, home prices soared up to 13% nationally as of March 2021. While you might not want to use cash from your portfolio or savings account to help with this, you can certainly help your child or grandchild with a down payment. To do this, you can transfer stock directly to the beneficiary. This is especially helpful if the beneficiary is in a lower tax bracket.
The beneficiary can then sell the stock and claim the capital gains on their tax return, noting that the cost basis will still carry over from the original purchase (for example, if the stock was purchased for $500 a share, the cost basis is still $500 a share, even if it’s now worth $1000 a share). While the recipient would still have to pay capital gains, a lower tax bracket means they may be able to pay lower taxes overall and have enough to put a down payment on a house.
You may need to be aware of the kiddie tax, however, so you should talk to a financial professional before using this strategy to make sure that it’s the right fit for your needs.
Leaving An Inheritance
You still can leave an inheritance for your beneficiaries. By today’s standards, you can plan a bit better than the old way of thinking, which was “leaving what you had” at the time of death. Planning is especially useful if you have beneficiaries with different needs living at different stages of life. You can look at Roth IRA conversions - which can allow for a lower tax rate, and your beneficiaries can eventually take out withdrawals tax-free. However, it’s important to remember that – due to the SECURE Act of 2020 – IRAs must be withdrawn within 10 years of the date of death or inheritance for any non-spouse beneficiary.
Gifting Money to Your Beneficiaries
If you want to explore options – educational, savings, home ownership, or traditional means – for gifting money to your beneficiaries, please contact us today. Our financial advisors will be happy to discuss your current situation as well as your estate planning needs and make sure that your wishes are met.
The Team at Chatterton & Associates
Listed entities are not affiliated with Royal Alliance Associates, Inc. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.