Many people who are planning their estate are told by advisors to give annual gifts to children and grandchildren up to the $14,000 yearly limit. It can help you avoid the estate tax of up to forty percent if your estate exceeds the federal exemption level. This year, the exemption is $5.43 million for a single person, $10.86 million for a couple. However, there is a lot more that you can do with this money than simply give it away. You can pass along wealth and wisdom through these annual gifts in a variety of ways.
Why Give Differently
The problem with giving an outright gift to a child or grandchild of up to $14,000 per year is that it may not have the intended effect that you had hoped. If the gifts are significant over time, your loved ones may take advantage or feel like they do not need to accomplish as much. However, you can use these gifts to create a different set of incentives for your loved ones that will help them for years down the road if you invest your annual gift in an alternative way.
Fund a Roth IRA
Children can open a Roth IRA as soon as they start to earn income, and you can help make contributions to the account up to the yearly amount of $14,000. The compound interest in a Roth IRA can return massive rewards in the form of tax- free wealth at retirement. In addition, helping your loved ones find ways to earn income to add to the Roth IRA is a great way to instill income while simultaneously reducing your overall estate. Investing the gift in an account that should not be touched until retirement also keeps your loved ones from accessing the money irresponsibly too early.
Pay Loved Ones’ Taxes
It can be easy for children and grandchildren to question why they work so hard when taxes take so much of each paycheck. State taxes, federal taxes, FICA, and more all take away parts of a person’s paycheck. By using part of your annual gift to pay the taxes on their paychecks it can keep your loved ones interested in working. In addition, it continues to lower your overall estate for your own tax purposes when it comes to the federal exemption level.
Cover Health Insurance
Many people do not like to purchase health insurance because it is expensive and most believe that they will never need it. Others feel stuck in jobs that they do not like because it is the only way that they can keep good health insurance without overpaying. By covering your children or grandchildren’s health insurance coverage, it can free them to pursue a career that they love without regard to a health plan.