4Thought Financial Group's Unique Investment Methodology
"In order to achieve life goals, one should diversify at the level of investment method, applying the most effective aspects of multiple, completely divergent methods of investing, and not be dogmatic about using a single method"
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This is a common topic that never seems to go away. From parents to grandparents, each year the questions arise: "How much am I allowed to give to my kids and grandkids? Should I set up a 529 plan? What are the limits on how much to give?"
Three questions were recently posed by my clients:
A grandfather (who is a widower) asked, “If I want to pay for my grandchildren to go to summer camp, can I do that? Can a 529 plan be used for this?”
The answer I gave the grandfather was that he could pay the $10,000 for summer camp. He would just write a check to his daughter and she would pay the camp directly. Since he’s allowed to gift up to $15,000 per grandchild (in 2018) without breaching the annual gift tax exclusion, the $10,000 for camp would reduce the amount for future gifts this year to $5,000. If he was to do this for the other grandchild, he could write another check to his son-in-law, who could then write the check to the summer camp. The annual exclusion amount applies to each gift recipient.
There are also opportunities, in addition to cash gifts, to pay for education and medical expenses directly, above and beyond the $15K limit (called the “educational and medical exclusions”). If the grandfather wrote a check directly to an educational institution for tuition for his grandchild, this would meet the definition. He could also do the same thing for medical expenses, paying the medical institution directly. In fact, depending how generous grandpa was feeling, he could pay for the summer camp ($10,000), make a gift of cash (or to a 529 plan) for $5,000, and pay an educational institution’s tuition directly (for any amount over the $15,000 annual exclusion). The 529 plan could not be used to pay for the camp directly.
An adult son and daughter (Mom is currently 88 years old) asked the following question: Can they make annual gifts out of their mother’s accounts to each of their respective families? Since they have a power-of-attorney that lets them make gifts, legally they can make the gifts. Next is the more complicated question. Since Mom is in an assisted living facility with dementia, what happens if she lives to be 100? The bulk of Mom’s investments are in a Traditional IRA. Since she is over 70 ½, she must take her required minimum distributions out of her IRA (or face an additional 10% tax penalty). This year that amount is 8.5% of her prior year-end account value. Next year it is 9%. Each year the percentage goes up. You can see the problem. Not only does the withdrawal increase every year, but the income taxes due also go up, and must be paid. This becomes a spiraling effect and could potentially deplete Mom’s account. The future risk the son and daughter have is that if they deplete Mom’s account and she lives too long, they may have to supplement her living expenses, or she will have to go on Medicaid.
Another set of grandparents had set up 529 plans and began systematically investing $50 per month for each grandchild’s eventual college tuition. Unbeknownst to the grandparents, their son and daughter-in-law were planning to apply for financial aid for their children. When she found out about this, the daughter-in-law called the grandparents, frantically insisting that the approximately $3,000 per grandchild in each 529 account would have to be withdrawn immediately before the financial aid forms could be filed. Under this scenario, the grandparents had the right intentions, but they did not coincide with their children's plans. Lesson learned. Talk to your children. Ask the question of whether they’ve budgeted for college, and how they plan on paying for it.
Parents and grandparents can give $15,000 per child in 2018 without filing a gift tax return. If they are couples, each parent and grandparent is entitled to give, so the amount would be double per child. As stated previously, gifts to 529 plans are included in these gifts. 529 plans are managed by each state (through only one or two investment companies per state), but products should be researched to determine if the plan complies with the 2018 changes in the federal tax law. Such changes include that 529 plans not only can pay for tuition in colleges and universities, but also tuition for private elementary and high school. Other credits were also added in the new tax law for children under 17 years old. These credits have income limitations that need to be discussed with your accountant or tax advisor.
As with any gift, your accountant or tax advisor should be consulted first to make sure you’re eligible to make the gift and that it makes economic sense.
My late mother once said that she would rather see her children and grandchildren enjoy the money when she’s alive than the alternative.
4Thought Financial Group
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