As a result, gifting to children has become a place for many potential pitfalls, including children mismanaging the money, not having the life experience to protect their newfound wealth, or being targeted by individuals who want a piece of the wealth for themselves. The Network Journal has highlighted some common, yet often less-than-ideal gifting scenarios, and offers some better alternatives.
When it comes to gifting to minors, you may think that there’s little options to choose from. After all, minor children cannot own financial assets without an adult being named as a co-owner, conservator, custodian or some other fiduciary position. Generally, the money will be held until the child reaches the age of maturity, (normally 18), but the money can be flushed quickly if the beneficiary is not careful. In other cases, events like sudden death or divorce of a primary beneficiary can lead to a minor child (usually the contingent beneficiary) becoming the unexpected recipient of funds that he and his family can’t access without court supervision. One way to get around this is designating a trust with the minor as the beneficiary. Name a trustworthy person as trustee, have provisions that protect from the beneficiary’s youthful indiscretions, creditors and disabilities.
On paper, real estate may sound like a great idea for a gift. Once you help with the down payment, you also have to name yourself on the mortgage. Depending on your situation, this may lead to issues like depleting your gift-tax exemptions, hurting financial aid for your college-age grandchildren, and of course, your children not being able to keep up payments. If you go this route, be sure to have a frank discussion on the responsibilities of real estate, and be sure to create a backup plan if your child cannot keep up payments.
Other assets can come across as a great gift on paper as well, but some will work better than others. If you plan on gifting assets during your life, capital gains are the taxes you will need to look out for. If you gift your child shares of stock, and they are highly appreciated since you bought them, your child has to pay higher capital gains. The better idea is to either gift cash or stock with minimal appreciation. A better idea if you do have highly appreciated stock is to hold onto it and bequeath it after your passing.