We usually think of estate planning as something that will benefit our family after we die, but there are some benefits of estate planning that will be helpful to you and your family during your lifetime. One example is what we give our children. Chances are that all of us will leave something to our children, but when, how and what we give them before we die can make a huge difference in how the gifts are treated by tax laws.
The first step to take in creating a gifting plan for your children (and even grandchildren) is to assess your own lifetime needs. It wouldn’t make much sense to give money to your children during your lifetime that they will have to turn around and use for your care as you get older. So make sure that you have a plan in place for yourself first.
There are many ways to give: outright cash, stock, college tuition, and medical care are just some examples. Each of these carries certain restrictions but also certain benefits under a carefully drafted estate plan. So make sure to consult with an estate planning attorney who understands gifting before you start the process. There are tax advantages, but done incorrectly, it can end up being a liability for you and your kids.
While cash is certainly an option as long as you feel like your children will use it responsibly, assets such as stock that can actually increase in value and possibly pay them dividends may be a better option. And if they later sell the stock at its peak, they may be able to benefit from lower taxes on it because it is not taxed at its current increased value but at the price you paid for it, possibly many years ago at a much lower price.
If you want to make gifts to younger children or grandchildren, make sure that you observe rules that could make those gifts taxable. Generally you can help pay for college tuition or medical expenses, but there are strict rules about how the gifts are made. For example, tuition must be paid directly to the school, not to the student or parents of the student.
There are many pitfalls in making gifting a part of your estate plan, but with the advice of an experienced estate planning attorney, you and your family can benefit from the gifts rather than incurring penalties for you or for them. And you will enjoy being able to see them benefit from the gifts while you are still alive, which is a gift in itself.