Giving Significant Money to Your Kids
You probably give things to your kids each day, and you may also give presents on special occasions. Chances are, you don't think of this as being generous or making gifts—still, they're gifts just the same. Maybe it's only a visit from the Tooth Fairy, a reward for a good report card, or a birthday present: All are gifts.
In addition to the little things you give your kids, there may be times you give more significant gifts, such as cash or securities. These larger gifts are perhaps motivated more by your own estate planning concerns than thoughts of generosity, but whatever the motivation, it's important to understand what making gifts to your kids can mean. It's also necessary to understand the impact of gifts given to your kids by other people.
Making Gifts to Kids
Piggybank on It
According to child-care expert Dr. Spock, kids are spoiled as babies from overattention. They learn to always put their needs first. Money itself doesn't spoil a child (rich kids aren't necessarily spoiled); it's only how you use the money with your kid that can continue early childhood lessons in how to be spoiled.
Piggybank on It
Gifts of U.S. Savings bonds (Series EE or I) can be made in a child's name, with a child's Social Security number listed on the bond. You don't need a custodian to hold the bond, no matter how young the child may be.
How generous should you be to your child or other kids? When it comes to your own child, there's always a concern that giving too much will spoil him or that you'll give too much and it will be taken for granted.
Concerns about spoiling aside, your generosity to your child is guided by your financial abilities. You can give only what you can afford and what you think is appropriate under the circumstances.
Certainly, at times gifts are standard operating procedure (and maybe even expected). Often, these gifts are made in cash.
- Tooth fairy offerings. Payments left under the pillow for the first tooth or two your kid loses may come as a big surprise. Unfortunately, kids become knowledgeable very soon about who the Tooth Fairy really is and come to expect payment for each lost tooth. Usually, the first tooth warrants a big surprise—$1 or even $5 in some neighborhoods is the going rate. Then, each successive tooth may fetch a 25¢, 50¢, or $1. In other neighborhoods, the traditional cash left under the pillow is being replaced by small things, such as stickers.
- Birthday presents. There's no standard on what's appropriate for a birthday gift, and the size of the gift can vary greatly. The amount may differ depending on whether it's a gift to your own child, a grandchild, a niece out of town, your child's classmate, or his best friend. You may spend $10, $15, or $20, depending on what's customary in your area and what you can afford. It's not common for a parent to give his own child cash for his birthday (at least until he's more adult), but cash may be appropriate if you're sending a gift by mail to a relative out of town. Sometimes, birthday gifts are made in the form of savings bonds to mark the occasion.
- Gifts on religious occasions. Gifts given to a child to mark a religious milestone—a bar or bat mitzvah, or a confirmation—can be nominal in amount or quite large. The going rate in gifts these days varies from place to place, but the total gifts your child may receive on such occasions can add up into the thousands.
- Graduation presents. A decade ago, a lucky high school senior off to college may have received an electric typewriter. Today, it's a computer. But cash gifts from family friends or other relatives also may be given.
Watch Your Step
Before you dump lots of money in your child's name, make sure that you understand the impact it may have on his ability to qualify for college financial aid. Currently, money saved in the child's name is counted more heavily (35 percent) than that in the parent's name (5.6 percent) in figuring financial aid eligibility. Colleges expect that kids will spend their money on their own education.
Financial Building Blocks
Kids pay tax on income they receive. However, for children under the age of 14, income may be subject to a “kiddie tax.” This means that income over a set amount ($1,400 in 1999) is taxed to them at their parent's highest tax rate. It's as if the parent had received the income instead of the child. However, careful planning, such as putting money into appreciating assets that don't throw off current income, can avoid the impact of the kiddie tax.
If you are financially fixed enough to seek estate planning guidance, then you're probably in a position to make larger gifts to your child. You are encouraged by the tax laws to make gifts to your kids for several reasons:
- You reduce the size of your estate. Everything you have will be taxed after you die, but a person can die owing no federal estate tax if his assets don't exceed a certain amount ($650,000 in 1999, increasing in stages to $1 million by 2006). In effect, married people can have twice as much in the family without any estate tax concerns. But if there's more involved, it becomes important to find ways to transfer assets to children or others without any transfer tax costs. If such planning isn't undertaken, then inheritances for children will be needlessly reduced by estate taxes.
- You can save income taxes within the family. If income-producing assets such as stocks and bonds are given to children, the recipients may pay tax on the income from these assets at a lower tax rate. This is called income-shifting, and it saves the total taxes paid by all family members.
More on: Money and Kids
Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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